With day one of oral arguments in the Supreme Court of the United States (SCOTUS) case Christie v. National Collegiate Athletic Association complete, the line of questioning focused on the intent of the Professional and Amateur Sports Protection Act (PASPA), states’ rights with special emphasis on New Jersey, and tribal sovereignty. Thus, the gaming industry is optimistic about a potential outcome of regulated sports wagering in the U.S.
The final ruling could have major implications for lotteries, commercial gaming operators and tribal enterprises as it relates to offering sports wagering as part of their product set. Gaming industry leaders will be keen to understand what the legislation means for them as it relates to new opportunities. This article focuses on how we got here and, more specifically, what the immediate future may entail for the industry:
- Background on potential legislation
- What state governments are doing in anticipation of the Supreme Court ruling
- The opportunities for entry into the sports wagering space
- Business models tailored to fit the objectives of those eligible to enter
PASPA and Christie v. NCAA
PASPA was passed in 1992, functionally outlawing sports betting in the U.S. at both a federal and state level other than for a few niche exceptions. As state governments and sports leagues have understood the demand for sports betting in the United States and observed the results in regulated markets both domestically and internationally, there has been a push to revisit regulating sports gambling.
An opening to overturn PASPA arose when SCOTUS released its calendar in June for its 2017-2018 case schedule, and New Jersey’s campaign to be permitted to regulate sports betting was selected (Christie v. NCAA). Oral arguments were held on December 4.
If SCOTUS rules in favor of Christie, the doors would be open for states to regulate sports betting. Given that many states will be quick to act on sports betting legislation as budget shortfalls are crippling many state governments, it is imperative that lotteries, commercial gaming operators and tribal enterprises act quickly to develop a plan to maximize the opportunity to enter the sports betting space.
A Changing Landscape
Support and legislation support for overturning PASPA has been driven by (1) state governments looking for additional rights and revenue streams and (2) sports leagues that have realized that illegal bookmaking poses a greater risk to the integrity of their leagues than regulated gaming. Regulated sports wagering also serves to increase fan engagement.
No fewer than 20 states have filed amicus briefs with SCOTUS in favor of New Jersey and, even further, several states have already passed legislation permitting sports betting if Congress repeals PASPA or if federal courts declare the sports betting ban to be unconstitutional:
- Pennsylvania: Passed HB 271 (November 2017), which permits casinos to offer sports betting at a facility or online for a license fee of $10 million.
- Connecticut: Passed HB 6984 (June 2017), which would allow Foxwoods and Mohegan Sun to operate legal sports books in their casinos.
- Mississippi: Passed HB 967 (June 2017), an amendment to the 1990 Mississippi Gaming Act to legalize sports betting.
- New Jersey: Passed S-2460 (October 2014), allowing casinos and racetracks to take sports bets.
Additionally, the views of sports leagues have evolved on the subject. In the past, former NBA Commissioner David Stern had been one of the leading voices opposing sports gambling. However, current NBA Commissioner Adam Silver not only believes that regulated sports betting is a preferred alternative to illegal gambling as it relates to the integrity of the league, but that it promotes interest in the sport.
“People want to bet throughout the game,” he says. “It results in enormous additional engagement with the fans.”
Even NFL Commissioner Roger Goodell, who has been one of the staunchest opponents of regulated sports betting, acknowledged in a recent quote that “society in general has a little bit of a change with respect to gambling in general.”
What this means is that for gaming enterprises in one of the states supporting New Jersey’s campaign, each is likely to encounter its own debate on sports betting. If this debate ends positively for sports betting, those companies will have a new business opportunity. And even for businesses not in a state currently pushing to expand gaming, due to the ability to operate in another state through a relationship with a license holder (the “Market Access Model,” explored below), a new business opportunity in sports betting can be created. In light of the December 4 oral arguments, these new opportunities may be coming very soon.
12 Billion Reasons to Act Now
The revenue opportunity for sports betting operators in the U.S. varies depending on the number of states that regulate and the distribution models they condone (retail and/or online). Consensus estimates range from $6 billion to $12 billion in gaming revenue (house win) from legalized sports betting.
Prospective sports betting operators should position themselves now to act if PASPA is overturned next year, which means developing a view, a strategy, and ultimately, an operational model and solution. Time to market will be crucial, especially for casino operators, who risk losing not only the opportunity of early adoption in sports betting but also market share in traditional brick-and-mortar gaming, as patrons flock to the competitor’s new sports book, whether in a rival casino or online.
Participation in the topic now will also mean businesses can become educated on the issues. Thus, they will be well positioned to lobby for legal and regulatory outcomes that support their ambitions. Many of the key regulatory issues are still undetermined in many jurisdictions, including key ones such as:
- Who will get the operator licenses?
- Will the licenses permit retail alone or will online sports betting be allowed?
- What will the cost of licensing be and how will revenues from sports betting be taxed?
This debate presents a tremendous opportunity for operators in these jurisdictions to open conversations with regulators about ways regulation of sports betting can bring a sizable stream of tax receipts to the state, and what that can mean with existing budget shortfalls. Being part of the debate now could also present an opportunity to avoid potential threats—including, for example, who gets the operator licenses and what the tax rate is.
By way of example, in the most recent piece of gaming legislation passed in Pennsylvania, legislators set the tax rate for online slots at a nearly unworkable 54 percent of gross gaming revenue, an outcome that market participants will want to avoid as new markets begin to regulate.
Build, Buy or License
One of the most important questions prospective operators must answer when exploring entry into sports betting is the method of accessing the opportunity.
There are four potential business models that are common to both retail and online distribution.
Three relate to accessing the industry for their proprietary brands:
- Build: Hire a team of developers and sports book traders to build a proprietary service.
- Buy: Acquire an existing sports book operator or supplier and deploy that locally.
- License: License sports betting technology/services via a supplier.
The fourth relates to monetizing via a third-party brand:
- Sell Market Access: Gaming companies can rent their sports book opportunity to a third party.
While the “build” model may seem like an attractive option for those operators looking for a custom solution, it is important to consider the significant financial and time commitment it would take to develop a platform. Thus, building will not be an option for most operators because of the high cost and delayed time to market.
The “buy” option is one that may work for certain operations if they have the capital. Operators that wish to buy will need to work with experts in evaluating targets, and those targets are likely few and far between.
The “license” model will be attractive to many operators who wish to maintain their brand in the sports betting space. Additional advantages to the license model is that the time to entry is short because the platform exists, the technology is proven, and the suppliers have experience supporting a sports book.
Finally, there is the option to sell market access. This model would be attractive for operators who can find the most value in utilizing the betting license as an asset for sports book companies or large national casino brands who wish to enter a market they would not be eligible for otherwise. This option might be particularly attractive for operators who have limited capital, small databases, or do not want to hire the expertise to manage a license relationship.
Within each of these models, there are pros and cons, significant financial and organizational implications and, crucially, relationships the business likely does not have today.
As the industry waits anxiously for the official ruling from SCOTUS, which could come as early as January, but which is expected around May, there are several steps that gaming companies can take to prepare for this new landscape.
- Work with state legislators to carve out favorable legislation. Make your voice heard. Neighboring states that enact sports betting legislation before you may steal not only your sports betting potential, but your existing customers may travel across state lines to be a part of this newly legal form of wagering.
- Size your market. Determine what sports betting will mean to your business and what type and level of investment you want to make.
- Prepare a business plan. This includes developing partnerships and in-house expertise. It will be paramount for operators to have harmonized regulatory, marketing and product strategies to achieve a positive outcome, and first-mover advantage will give a tremendous lift to those who prepare.
It is an exciting time for the gaming industry as a new revenue stream is poised to be available to license holders. As sports betting emerges in the U.S., businesses will be faced with leveraging and growing their in-house expertise, and in most cases also leaning on partners to support entry into this new and exciting space. It is no easy task, but those who thoughtfully prepare and are among the early adopters will reap the massive benefits of this multibillion-dollar market.