Wired

Will the latest DOJ Wire Act decision impact investments in sports betting company?

Wired

It is no secret that sports betting is the hot topic of 2019.

In fact, one can’t escape reading and hearing about the latest events and announcements, important or trivial, whether in the general business press, on television, in trade publications or in just about any gathering of gaming industry stakeholders.

One reason for all the interest is excitement for growth as state after state legalizes sports betting.

Another reason is the drama created by the Department of Justice in reversing the Obama administration’s interpretation that the 1961 Wire Act only banned sports betting by telephone across state lines.

The 1961 law was written before the internet and before computer servers. In those days, the situation was simple: if a person in one state called another on a telephone to place a bet, it violated the law. Today, however, computer servers exchange information across state lines for virtually all financial transactions.

The far-reaching possibility is that a person can place a bet in, say, New Jersey with both the sports book and the person being in New Jersey, but, because the transaction might be serviced by servers in other states, say by the bettor’s bank in New York, that the bet is illegal.

Drawing the possibilities to an even greater extreme, even a conventional bet like spinning a slot machine inside a casino with cash can be considered a Wire Act violation if the transaction is aided by servers in other states.

Now, the Department of Justice might not take the issue to such an extreme, or such an interpretation might not stand up in court, but it illustrates the complications and potential unintended consequences of applying a literal reading of a 1961 law to the practical, everyday usage of 21st century technology.

So where does this bring us, beside all of the excitement and drama? On one hand it leaves us in a state of uncertainty.

However, all is not uncertain. We know that more states are legalizing sports betting, and that state lotteries are interested in getting in on the action. In other words, nearly every week there is another state congressional delegation that has a vested interest in opposing the Department of Justice interpretation.

So, the forces of sports betting and online gaming are continually getting stronger, suggesting the Department of Justice itself might narrow its view of what is legal.

Heck, even anti-online-gaming Sheldon Adelson, often speculated as the indirect power behind the Department of Justice decision, would demand a narrow interpretation if he thought the most extreme interpretation would freeze all gaming.

The DOJ might have hinted at a narrower opinion in its request that the New Hampshire Lottery suit against its opinion be dismissed, saying the lottery has no standing because it’s unlikely to face enforcement.

So, assuming the status quo stands, what stocks make sense for investors in public markets?

The companies getting the most publicity in the general business press are the big companies—MGM Resorts, IGT, Scientific Games. However, it appears unlikely that sports betting can generate enough new business to move those stocks appreciably.

For MGM, what happens at its Las Vegas and Macau casinos and in reforming its cost structure will have a far greater impact. Likewise, lotteries, slot machines and casino systems are bigger businesses for IGT and Sci Games.

So, if you like their stories absent sports betting, you can consider sports betting icing on the cake but not in itself a reason to buy the stocks.

Use William Hill as an example. Cutting the bet limit on gaming machines at its U.K. retail shops has had a much greater impact on the business than the growing U.S. sports betting operations.

One solution is to spin off online gaming subsidiaries, giving investors pure plays into sports betting with companies backed up by deep-pocketed parents.

William Hill did something similar in its deal with Eldorado Resorts in which Eldorado owns 20 percent of William Hill’s U.S. operations. (That, by the way, makes Eldorado an interesting sports betting play as a casino operator.) Scientific Games, likewise, will spin off its social gaming business as a separate public company.

We’ll see if other companies follow suit.

Of course, you can target individual pure-play sports betting companies, but picking winners in such a fast-changing world is more like throwing darts than doing fundamental analysis, because as technology changes, so do the rules of the road, as evidenced by the out-of-the-blue DOJ opinion.

But there is growth to capture with various estimates that U.S. sports betting can grow to be a $13 billion to $17 billion revenue business, up from $497 million last year. Chris Grove of Eilers & Krejcik Gaming estimates a $5 billion market by 2023 just on what we know today.

Perhaps the best approach for now is to buy a basket of pure-play sports betting stocks and ride the wave.

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