When mobile sports betting went live in New York state on January 8, many around the industry were curious to see if the market would perform well enough to outpace the controversial 51 percent tax rate for operators, the largest to be implemented thus far. Even on day one, sentiment was mixed—Action Network CEO Patrick Keane told CNBC it was “arguably the biggest day in the history of sports betting,” while Jim Chanos, renowned hedge fund manager, called the business model “flawed” from the outset.
Well, how does $250 million in tax revenue in less than six months sound? Bone-crunching for operators surely, yet symphonic for state officials whose budgets have faced unprecedented squeezing thanks in large part to the Covid-19 pandemic. This push-and-pull between the two sides has come under more scrutiny than ever before as the industry continues to expand and rates continue to increase.
And if anything, tensions seem to be escalating—when asked about New York’s tax revenue explosion, ex-Andrew Cuomo spokesman Rich Azzopardi told PlayNY that “(operators) said it wasn’t going to work but the proof is in the score—Taxpayers 1, Hacks 0.”
Even markets that have yet to implement sports betting, such as Missouri, are having trouble finding common ground; shortly after a recent sports betting provision fell through in the waning hours, state Senator Denny Hoskins was adamant that casinos were chasing “a golden ticket,” and that operators “basically killed this because of their greed.” Hoskins has proposed a 21 percent tax rate in the Show Me State.
So what does this mean for the sustainability and profitability of the industry moving forward? How will operators choose to navigate increasing tax rates with narrowing margins, and what impact will it have on player experience? Has sports betting expansion become lawmakers’ panacea for ailing budgets? For most of these markets, especially on the East Coast, there are still far more questions than answers.
In the meantime, however, businesses are doing what they can to stay competitive while convincing players to stay within legal markets, which are in many ways at a disadvantage against their offshore counterparts.
Keeping Players in the Legal Market
Perhaps the one thing that both states and operators can agree on is that markets should be structured in such a way that keeps players from gravitating towards gray or black markets, which have had a decades-long head start in most states. It appears, however, that they disagree on how to go about doing that, or what “success” really means for everyone involved.
“If the intent really is to help channelize the black market and offer consumer protection, a super-high tax rate is in many ways counterintuitive to doing so,” says Seth Young, chief strategy officer for FSG Digital, the sports betting and iGaming affiliate of Fifth Street Gaming.
“It seems more like a cash grab than it does a consumer-facing initiative. That said, if the money is spent for the benefit of the citizens and is allocated for good public policy, that’s a very different conversation. But government spending hasn’t always been super-efficient. As far as promotions go, we’ve seen a massive pullback from operators in states where you have unsustainable rates, and that opens the door for the black market too. The black market is very much flourishing in certain places because of butchered structures.”
Player exodus is bad for all sides—it takes hard-fought money out of everyone’s hands, and it reflects poorly on states’ market structures if players are willing to make the effort to go elsewhere when legal options are right in front of them. It also leaves players vulnerable, with no regulations or consumer protections to fall back on. This issue is at the forefront for organizations such as the American Gaming Association (AGA).
“One of the things that we have to be mindful of is the idea of building a sustainable market,” says AGA Senior Vice President Casey Clark. “The AGA has never been focused on being quickest to market, or rapid expansion of legalization at all costs; it’s been about getting it right, and our focus there means creating the right policy environment, the right regulatory environment, the right tax structure, the right responsible gaming provisions, the right consumer protection provisions.”
“We know from AGA research that consumers overwhelmingly want to be betting in the legal market. So we need to all work together, everyone involved in this business, from the policy makers to regulators to leagues and teams and media companies and gaming operators and everybody in between; we all have to be working together to create that opportunity for American sports bettors who have been betting on sports since there have been sports to bet on to migrate their action into the legal marketplace.”
Impacts on Player Experience
In many ways, the numbers speak for themselves—in total, legal U.S. sportsbooks netted about $1.4 billion in gross gaming revenue (GGR) in 2021, which is still peanuts compared to the $17 billion that offshore operators are estimated to rake in annually. What’s worse, up to 55 percent of current U.S. sports bettors aren’t even aware that they may be betting with an illegal operator, according to the AGA. This then forces companies to make some tough decisions, decisions that typically have a direct effect on the end user.
Brian Wyman, senior vice president of operations and data analytics for gaming consultant The Innovation Group, has had to help businesses consider some of these decisions.
“All these things are things the operators are thinking about. It’s player reinvestment, it’s advertising, it’s reinvestment in that technology stack, it’s customer service, it’s the quality of their retail sportsbooks,” says Wyman. “And when the tax rate is high, the operator has to make some decisions about how to allocate the remaining funds. The operator’s not under as much pressure when the rate is 12 percent.
“If you think about some of the big cost centers for sports betting operations, you’ve got promotional spend that really goes right into the players’ hands. That’s a major driver of expense for these businesses. And one thing that’s sort of unique about the New York model is that, in a lot of jurisdictions you’re able to deduct that promotional spend before you incur the tax rate. In New York you’re not able to do that, and so that makes New York an even bigger challenge for operators.
“Another is advertising and media spend. You see the commercials with Caesars on television, or you see DraftKings and FanDuel and MGM all have some level of media that they’re out there with, that’s another large spend category. And then it’s investment in their technology stack, it’s ‘Do I have an app that is right for my consumers?,’ it’s ‘Am I making sure that I’m able to leverage the data that I have to make sure that I’m putting a competitive app on the market?,’ and that’s a user experience and interface thing but it’s also ‘Am I offering enough variety in terms of the games and the types of bets and things like that?’”
Bettors are no different than any other consumers in the sense that they will usually take their money to businesses where they feel they are getting a good deal, and that becomes tricky when there’s not a lot of room for experimentation.
“When you focus on cost-cutting measures, you don’t really focus on growth,” says Young. “That’s two different things. Tax rates most directly affect businesses’ ability to grow and innovate.”
When new opportunities do arise, however, competition is usually stiff, and margin for error is slim to none. Single-game parlays, or parlay bets featuring multiple wagers on the same game, have emerged as a popular option.
“You saw a race recently from a lot of shops to get single-game parlays up,” says Wyman. “That’s a big math challenge to get that right and to not get beat up offering these parlays. Because if you don’t get the math right, savvy players can really take advantage of that.”
The iGaming Element
While in some respects, it’s easy to lean on the side of pessimism when it comes to the long-term prospects for operators in markets with tax rates above 15 percent—currently the case in eight states—but there is one wrinkle that could prove to be a savior of sorts (or a savior of sports), and that is iGaming. It’s no secret that online casino gaming has much better margins than sports betting, yet historically the two sectors haven’t always gone hand-in-hand.
“I think what we know to be true is that there had been an expectation or a thought that iGaming and brick-and-mortar casinos were usually mutually exclusive propositions,” says Clark. “Over the last few years, we’ve seen that they’re complementary and not competitive. There are a lot of opportunities that exist for operators, whether they’re brick-and-mortar operators or they’re traditional legal sports betting operators, to bring another form of gaming to meet consumers right where they are. That’s something that the gaming industry has been really strong at for a long time, innovating to ensure the customer experience is something that meets or exceeds their expectation.”
Some states, such as Pennsylvania, with a sky-high sports betting tax rate, require sports betting licenses for iGaming. That then begs the question of whether the potential benefits of iGaming can outweigh the potential losses of sports betting, and whether operators will accept those pitfalls to gain a foothold in the iGaming space, which is expanding in both legality and accessibility.
“I don’t think any operators right now would categorize sports betting as a necessary evil to get iGaming, but I do think that operators generally view iGaming as a real prize,” says Wyman. “The revenues will be larger, and will grow over time. They have better margins, so I think iGaming is the real prize here, for sure.”
According to the AGA, online gaming revenue surpassed $3.7 billion in 2021, between just six states—Connecticut, with just 3.5 million residents statewide, tallied nearly $50 million in revenue in only two months. And according to a recent report from Mordor Intelligence, the overwhelming majority of online casino bettors in the U.S. were between the ages of 21 and 34 in 2021, which should come as little surprise given the familiarity with online interfaces.
“There’s a fair amount of money to be made in the online casino space,” says Young. “Consumers are certainly gravitating towards convenience gaming.”
Success is often a function of realistic expectations, and it is certainly realistic to expect operators to offer first-class experiences on a digital platform; gaming often has a way of attracting the best and brightest. Rather, the question now becomes whether they will get the opportunity to, given current market conditions.
“As new generations come into the gaming business or are interested in it or attracted to it for whatever reason, gaming is going to continue to innovate and be an entertainment option of choice for everybody,” says Clark. “There’s a lot to unpack as far as how operators decide to do what where and when and at what cost, but the most important thing to think about is how we ensure that we’re providing the right kind of consumer protections, or that we’re enabling people who want to spend entertainment dollars to gamble have that opportunity with the protections of the regulated marketplace. iGaming is only legal in a handful of states, unlike sports betting, which is now widely legal around the country. iGaming is still pretty confined, so there’s a lot of opportunity for growth in that marketplace.”
At this point, all signs would indicate that the combination of sports betting and iGaming is poised to dominate the industry moving forward, but it remains to be seen whether or not the proper balance between states and operators can be established before businesses go bust and states are left to re-think budget woes once again. Indeed, it would appear that if no adjustments are made, Azzopardi’s scoreboard will be reset to: Taxpayers 0, Hacks 0, with offshore books coming out on top.
USA SPORTS BETTING TAXES
|Arizona||Mobile and retail||10% online, 8% retail|
|Arkansas||Retail only||13% of first $150 million, then 20%|
|Colorado||Mobile and retail||10%|
|Connecticut||Mobile and retail||18% online, 13.75% retail|
|Illinois||Mobile and retail||15%|
|Indiana||Mobile and retail||9.5%|
|Iowa||Mobile and retail||6.75%|
|Louisiana||Mobile and retail||15% online, 10% retail|
|Maryland||Mobile and retail||15%|
|Michigan||Mobile and retail||8.4%|
|Montana||Lottery monopoly||Revenue minus management fees|
|Nevada||Mobile and retail||6.75%|
|New Hampshire||Lottery monopoly||51%|
|New Jersey||Retail only||14.25%|
|New Mexico||Tribal retail only||Revenue minus expenses|
|New York||Mobile and retail||51%|
|North Carolina||Tribal retail only||Revenue minus expenses|
|Ohio||Mobile and retail||10%|
|Oregon||Lottery Monopoly||Revenue minus management fees|
|Pennsylvania||Mobile and retail||36%|
|Rhode Island||Lottery monopoly||51%|
|South Dakota||Retail only||9%|
|Virginia||Mobile and retail||15%|
|West Virginia||Mobile and retail||10%|
|District of Columbia||Lottery monopoly, retail||10%|