The US: the last great frontier for regulation

Effective regulation is the bedrock of any efficient, expanding industry, moulding the standards to which it adheres and the pattern of its success or failure. Ineffective regulation holds industries back, forcing many businesses out and burying remaining markets under mountains of bureaucracy. This process takes decades, through the medium of legislative change and market evolution. A good example of an effective regulation is the US commercial casino industry, which has some of the most well established and stringent regulatory practices of any industry throughout the world.

It has led to an industry which holds its own against any other in the US and has become an accepted staple of American life. Into this environment comes two industries: egaming and sports betting, one through technological innovation and the other through the medium of the highly publicised US Supreme Court case which earlier this year stuck down PASPA. Both industries are well developed and regulated in Europe and the UK, and while the stakeholders in the US are broadly similar, the landscape is inherently different – and more challenging.

The dichotomy of the state over federal authority is one that has come to define the American experience. In the gambling industry, regulation remains a largely state-led process, with state legislatures and officials deciding many industry issues through lengthy debate. The federal government’s role has largely been to set the bar and take a back seat, entrusting the process to state regulators. There are times, however, when it has chosen to become involved in state law, particularly with the passage PASPA, which banned sports betting almost without exception in the US for 25 years.

PASPA, for all its intentions, was not a successful regulatory practice, creating an illegal betting industry which dwarfed the regulated sports betting industry in its size and scope of operations.

It failed due to many factors, including illegal betting, state desire for sports betting revenues, and the efforts of New Jersey and other industry stakeholders in changing both minds and attitudes towards sports betting. The Supreme Court case rested on the age-old question of whether the federal government should interfere in state affairs. In the end, state won out over federal.

Building the sports betting framework

The federal government is currently holding congressional hearings on federal sports betting regulation, inviting comment from all industry stakeholders. The biggest opposer of federal involvement in the sports betting process is the American Gaming Association (AGA), which recently called federal regulation “unwarranted”.

As long-standing opponents of federal involvement, Sara Slane, the AGA’s VP of public affairs, was stinging in her assault on federal authorities, saying federal regulation was an “abject failure for 26 years only contributing to a thriving illegal market with no consumer protections and safeguards”.

Among the proponents of a federal framework for sports betting is Senate minority leader Chuck Schumer, who has called for a three-pronged system dedicated to protecting integrity, consumers and young people, as well as preventing problem gambling. Jennifer Roberts, associate director of UNLV International Center for Gaming Regulation, offers her perspective on state versus federal regulation: “There are benefits to having a federal framework for sports betting because it can provide consistency in information sharing, taxation, public policy guidelines, and regulatory and reporting requirements.

She continues: “On the other hand, states have already overseen regulation of casino gambling and lotteries, Nevada has had a long history of regulated sports betting operating without federal oversight, and the risks of politicisation and regulatory overreach have some concerned about federal involvement.”

The initial beneficiaries of sports betting are likely to be the casinos themselves as state legislation predominantly limits external licensing for sports betting to those entities domiciled in respective states. This is essentially a closed circle and federal involvement in this process would add a layer of additional bureaucracy to an already complex regulatory environment.

In addition, federal authorities perceptibly commandeering state rights in the areas of sports betting via legislation is very similar to the arguments for creating PASPA – legislation which was ultimately defeated by a coalition of state, industry and connected stakeholders.

Riding the coat-tails of sports betting

As sports betting becomes more and more accepted and readily legalised, the biggest beneficiary of this process and the technological rise to be ready for it is egaming. In the same way that daily fantasy sports changed attitudes towards sports betting, paving the way for its legalisation, sports betting could have the same effect on egaming.

Independent of casinos, sports betting at a statewide level can only be achieved by the inclusion of retail sportsbooks, mobile and internet sports betting. Regulators in the US have largely not had to deal with concentrated technological innovation in the casino in the same way that their European cousins have had to over the last two decades, so will face an upward learning curve.

Slane says: “The faster regulators can get up to speed on changing consumer and technology trends and share ideas with regulators in other states, the better equipped they will be to protect consumers and oversee a dynamic industry.” Roberts believes there are now two big challenges for the fledgling industry: “Competing with the illegal gambling market and internet gambling.”

She continues: “Since many jurisdictions will have to confront the conveniences of an illegal market, allowing mobile sports betting may help with such a battle. Once mobile sports betting is permitted, taxed, regulated, and provides consumer protections, it is really a much easier path.”

A second US gold rush?

Before and following PASPA’s repeal, many UK and European giants ventured across the Atlantic, searching for opportunities. Firms including Paddy Power Betfair (PPB) and GVC threw their hats into the ring by buying American businesses or investing in the American market (PPB acquired a 61% stake in FanDuel and GVC entered into a $200m JV with MGM). Meanwhile, William Hill has been busy striking deals with land-based casinos and racetracks in order to increase its enviable US footprint.

For the most part, European operators have looked to lend expertise, be it via technology or management partnerships with US firms. Now that the dust is settling on the first wave of deals, the goals for all licensed sportsbooks are broadly aligned: low taxes and minimal product or market type restrictions, which will help suppress the historic market share of black market operators in the US, allowing their new ventures to thrive.

The easiest way to achieve this is to work with legislators at both state and federal level, something which Genius Sports has been involved in for four years now, as Chris Dougan, chief communications officer, explains: “Back in April 2016, we, alongside the AGA, hosted the first sports integrity-related event in the country, bringing together experts from law enforcement, academia, professional sports leagues, and government to highlight how technology is used in regulated sports betting markets to detect nefarious behaviour.”

Dougan adds: “This role as a source of information and education has extended to US regulators and we are proud to have assisted many of them in better understanding the key areas of trading and sports data.”

With the maturation of European and UK sports betting industries, the closing of some markets via advertising restrictions and the increased regulation of other markets, opportunities for new revenues and expansion are decreasing. Contrast this to the US, where you have a huge population largely accepted gambling. The potential for new states to open up to sports betting, together with readymade partner firms, means the opportunities are self-evident.

The new special relationship?

Education from UK and European operators may herald operator success in the US, but if state and federal authorities want to learn the best regulatory methods with both sports betting and egaming, then the easiest way to achieve this is to look at a successful gaming market with broad regulation.

Given the historical close ties between the countries, the UK has a unique opportunity to offer its extensive political and regulatory expertise by sharing its experiences, insights and recommendations with the US regulators.

Engagement with the UK Gambling Commission and the Remote Gambling Association, with its broad experience of dealing with industry issues, could smooth over many of the bumps in the regulatory process, while charities and integrity bodies like GambleAware and ESSA respectively could lend considerable expertise on problem gambling and sporting integrity issues.

Insights can also be learned from the evolution of European markets, as Dougan explains: “Although the UK regulatory model is seen as a global gold standard, politicians and regulators should also look to Portugal and France to help them better understand the challenges the sports betting industry has faced, partly due to punitive taxation measures.”

Although the development of a market in Europe and the UK has taken decades, appetites for sports betting are more immediate, with many US states rushing to put in place legislation prior to the Supreme Court case taking place, despite having little or no knowledge of regulating this industry. This has been successful for some and not for others.

One example of a state regulator moving too fast in its search to legalise sports betting and egaming is Pennslyvania. Two weeks after the Supreme Court ruling, Pennsylvania launched a licensing process for sports betting, without first establishing a regulatory framework, aiming to have sports betting by the new NFL season in September. Its initial plan was to offer licences to the 12 existing casino properties within its borders over a fixed period, with licences costing $10m each and GGR tax rates of 36%.

As a result of the high cost, many casinos chose not to submit applications, but late submission applications from casinos eager to grab first-mover advantage prompted a flurry of applications to the Pennsylvania Gaming Control Board (PGCB), resulting in a regulatory backlog. This, coupled with delays in the state legislature, resulted in this deadline being missed and the PGCB has only just begun reviewing applications and may not grant the first sports betting licences until 2019.

Too many cooks?

The federal government cannot intercede in the affairs of states, particularly in the areas of egaming and sports betting, however the nationalised nature of US sports and the technological potential of the internet in changing how the average US punter gambles presents a problem which can perhaps only be solved by overriding federal involvement and legislation.

The state-led casino industry presents both the problem in enforcing this approach and, in some respects, the solution. Existing casinos have been built and have grown within effective state regulatory frameworks, almost entirely independent of federal regulation. Entrusting the future of sports betting and egaming to the states, therefore, seems a sound strategy.

However, in regulating casinos, state regulators have largely only had to regulate one single offering. For the first time, they are having to deal with innovations which exceed their typical knowledge base and experience and are having to play catch up. As a result, it can lead to delays and potentially stifling the emerging industries growth.

For Slane, the challenge for state regulators is “staying nimble enough to keep up”. “This year, sports betting presents regulatory leaders with a new learning curve. But next year the major topic might be esports and the year after that it could be something else entirely.”

She adds: “Part of being nimble is identifying effective regulatory models and avoiding duplicating efforts. There are already many effective sets of policies and regulations that can be replicated across multiple states, but without the knowledge of what already exists, regulators are susceptible to reinventing the wheel.”

So, what is the best solution to ensuring the growth of these new industries, while also maintaining a role for all parties? One possible scenario would be for the federal government to issue non-mandatory guidelines on new industry offerings to all states, based on consultation with all industry stakeholders. These guidelines can be adopted by states with existing regulatory frameworks, augmenting their offerings and can serve as a universal means by which states entertaining legalisation of other casino gaming strands can proceed effectively.