Monopoly money: Assessing the merits of state-run online sports betting in New York

When it comes to legal online sports betting, there is little doubt New York would be a jewel in the crown of the rapidly expanding US wagering landscape. The state’s population of 19.5 million (15.5 million adults) is the fourth largest, it is home to a total of 10 professional sports teams across the four major leagues, and the income per household is above the national average.

There is also the appetite and pent-up demand to bet on sports. However, those New Yorkers patiently waiting for legal online sportsbooks to arrive were probably left dismayed when Governor Andrew Cuomo unveiled plans for digital betting to be state-run like the lottery with a single operator selected by the New York State Gaming Commission (NYSGC). Therefore, it appears choice would be limited to one of the brands partnered with four upstate casinos.

With the Empire State facing a $15bn budget deficit, online sports betting can go some way to remedying the fiscal woes by delivering $500m in revenue – eventually – says Cuomo. The FY 2022 Executive Budget Financial Plan projects that mobile sports betting will achieve revenue of $49m in FY 2022, $357m in FY 2023, $465m in FY 2024, before reaching $493m in FY 2025. By comparison, state budget director Robert Mujica has said an open model would deliver $50m in annual tax dollars for the state. Taking a conservative hold of 5% over the course of a year and the state taking half the revenue and the operator the other 50%, the governor is suggesting a monopoly model can achieve handle of $20bn.

That does seem rather optimistic seeing as New Jersey racked up $6bn in handle during 2020, although the pandemic meant there was no March Madness and no professional and college sports for four months. New York has more than double the population of its neighbor, yet getting anywhere close to Cuomo’s goal with a low-margin product like sports betting really only seems possible with an open online market driving competition, innovation, and choice for consumers. See states like New Jersey, Pennsylvania, Michigan, Illinois, and Colorado for examples of multi-brand markets. Meanwhile, a long-awaited study by Spectrum Gaming Group published in January for NYSGC suggests full-scale sports betting in New York could generate GGR of $816m-$1.1bn (online $669m-$937m).

A closed shop

Two states that launched online sports betting recently, Tennessee and Virginia, utilized their lotteries to regulate and oversee the rollout, yet both opted for an open model rather than the lotteries themselves, adding a sportsbook next to their numbers games. The likes of Oregon and Montana, with their own monopolies, have achieved underwhelming revenue to date, while the Washington DC lottery’s online sportsbook, Gambet from Intralot, has been ridiculed for its woeful lines and disappointing performance – just $18.7m in handle and $3.5m in revenue from late May through to December 2020.

“Lotteries have shown that they are not equipped to manage a sports betting operation. Washington DC is probably the worst example,” says Gene Johnson, EVP at Victor Strategies.

Critics of Cuomo’s plans also argue that a lottery-style, single-source offering does little to encourage those using unlicensed offshore books and street bookies to switch to the legal option. “If you are focused on driving out the illegal market, you need to give consumers choice,” says Sara Slane, founder of Slane Advisory and former VP of public affairs at the American Gaming Association. “Competition is going to drive choice, different product offerings, and better odds. If you only have one single-market operator, it is a lot harder to compete with the illegal operators.”

Then there is the money gambled legally by New Yorkers in New Jersey since retail and mobile launched in the summer of 2018. Indeed, it can’t be any coincidence that the cavernous FanDuel Sportsbook at Meadowlands Racetrack in East Rutherford, New Jersey, adjacent to the New York Giants’ and New York Jets’ MetLife Stadium and 10 miles from New York City’s Manhattan, easily outperformed all other land-based sportsbooks, including Atlantic City’s, with GGR of $22.5m in 2020.

Others simply cross the Hudson River to place wagers on their smartphones with any of the 20 online options. Or they make proxy bets through New Jerseyans. Research released this time last year by Eilers & Krejcik Gaming (EKG) estimated that New Yorkers gambled $837m on sports in New Jersey in 2019. This equated to 18.3% of the $4.58bn bet in the Garden State that year. If the same percentage was applied to 2020, it would suggest New Yorkers wagered nearly $1.1bn in their neighboring state. “New York could still lose 20% of New Jersey’s handle if offerings aren’t on a par with New Jersey in terms of odds and pay-outs,” Johnson suggests.

Based on the fact New Jersey’s sports betting revenue last year was $398.5m, which was a hold percentage of 6.4%, New York potentially lost out on revenue of around $70m and, crucially, $7m if applying an arbitrary 10% tax on GGR as an example. While $7m is a drop in the ocean compared to New York’s fiscal black hole, this was theoretically just the tax lost to those willing to schlep across the border to place bets. On top of this leakage, there is all the potentially lost tax dollars from the far greater action the illegal and offshore markets take from New Yorkers.

Money matters

Cuomo made clear his opposition to casinos being awarded licenses by stating in an interview with the NY Daily News that he’s not interested in making “a lot of money for casinos.” Later, during the state’s FY 2022 budget presentation in Albany, he said: “The second alternative is to have the people of the state of New York to get the profits from mobile sports betting and run it the way we run the state lottery. That’s where it’s state-run and the state gets all of the revenue. I’m with the people. I believe the people of the state should get the revenue.”

This wasn’t music to the ears of the casinos, particularly the four commercial casino resorts, all situated upstate, that have had retail sports betting since 2019. They are Tioga Downs Casino in Tioga Downs (FanDuel and PointsBet with its second-skin access), Resorts World Catskills in Sullivan County (bet365), Rivers Casino in Schenectady County (Rush Street), and del Lago Resort & Casino in Seneca County (DraftKings).

Last year, Rivers came out on top with $4.5m in GGR, followed by del Lago ($3.8m), Resorts World ($1.3m), and Tioga Downs ($1.1m) in last place. Online, of course, is the big prize for them. In addition, New York’s three tribal casino operators would be keen to pursue digital sports betting. “The tribes can do it under their own sovereignty, and it would be in a commercial environment where they would pay a tax to the state,” Johnson explains. “They are already very successful with their casinos and they have the in-built database.”

Responding to Cuomo’s comments regarding the casinos, Slane adds: “He has made comments that he is there not to make casinos rich, but I wholeheartedly disagree with that sentiment. These are tribal casinos and publicly traded corporations that have already invested hundreds of millions, if not billions, of dollars in your state, employ thousands of people, and they are not being able to compete with neighboring states and their [sports betting] platforms.”

Indeed, if you were in bet365’s shoes you’d be cursing your luck at investing $50m in Empire Resorts, becoming its second largest shareholder as part of a 20-year strategic alliance to one day offer online betting through its Catskills property, only for the governor to want to create a monopoly.

As Cuomo bangs the drum for a state-controlled model, Senator Joseph Addabbo Jr. and Assemblyman Gary Pretlow have submitted sports betting bills (S 1183 and A 1257 respectively), both of which were voted out of committee on January 20. The proposals allow the four commercial casino resorts and three tribal operators to launch two skins each. So, a maximum of 14 books. There would also be a one-off license fee of $12m for each online brand.

If all 14 are taken, which is a strong possibility, it would raise $168m for state coffers straight out of the gate. That’s a compelling proposition for legislators. Meanwhile, professional sports arenas and off-track betting facilities would be permitted to install betting kiosks, provided they are partnered with a casino. Online/mobile would be taxed at 12%, with 5% of tax revenue diverted to responsible gambing (RG) programs. This could all come to nothing, though, if Cuomo is determined to plow ahead with his vision, which Johnson insists “really looks stupid on the surface.”

You could argue, however, that New Hampshire has been reasonably successful with its single-operator approach. There, DraftKings operates two retail sportsbooks and its online sportsbook, with the Boston-based giant handing over 51% of mobile and 50% of retail GGR to the state for the privilege of being the sole brand serving a population of 1.3 million. The offering achieved $293m in handle and $11m of revenue for the state in 2020.

“I’m still waiting to see how New Hampshire plays out,” Johnson cautions. “Initially, it looks like a pretty viable solution, but I think that is largely due to having a monopoly. As that monopoly is whittled away by other states adopting, for instance Massachusetts and New York, I think that picture will change.”

Establishing goals

Thus far, it has tended to be smaller states that have adopted a monopoly model, so for New York to go down this path seems inconceivable to some. Rather than weigh up the pros and cons of this move, Richard Schuetz, a gambling industry veteran who has served as a commissioner for the California Gambling Control Commission, offers up this piece of advice: “New York needs to take a step back and address what the people want. Once that is determined, the establishment of the most appropriate model can be developed. If one looks at the recent discussions in New York, they may conclude that different groups want different models and the real issue is not about the models, but rather the goals.”

Schuetz points to Pennsylvania, which broke its own record for handle in December with $548.6m, as a target of criticism for its approach, including a prohibitive 36% GGR tax on sports betting. “These critics have no idea what Pennsylvania was trying to accomplish. Pennsylvania had one goal, and that was to fill a budget hole. They seem to be on the right track, for the state generates more payments to the government from gaming than any other. The issue then is to not be critical of the Pennsylvania model, but rather be critical of the goal – and they should understand that the politicians in Pennsylvania have a voracious appetite for more money to spend. It will be damn hard to change that goal.”

In the meantime, there needs to be a sort of compromise in New York otherwise, as Slane puts it, New Jersey “will be laughing all the way to the bank.” For instance, proposed tax rates for online operators in an open market could be increased, or they could pay more for licenses.

A state like New York could comfortably command one-off upfront license fees of $20m, perhaps even $30m a piece or more. EKG’s Chris Krafcik tweeted New York isn’t going to get to $500m with a single-source provider but it could get “within shouting distance of that” with multiple skins and a “PA-esque tax rate.” Meanwhile, Regulus Partners summed up Cuomo’s vision in a recent note when they wrote: “A monopoly with a 50% tax rate might sound commercially crazy but it is more in line with New York’s ‘way’.” So, the Empire State may not turn out to be quite the jewel many expected.