Why the 'flyover states' could hold the key to US sports betting

Until Christie versus the NCAA came before the Supreme Court of the US (SCOTUS), no one aboard a flight from New York to the west coast would have viewed the towns, cities, plains and mountains scrolling by below them as hotbeds of potential sports betting regulation.

Such is the velocity of change in the US gambling scene that, should the SCOTUS decision go the right way and PASPA be overturned, then over a dozen states will either be ready with legislation or poised to pass bills that would pull the trigger on the biggest ever expansion of legal sports betting in the US.

The map of US sports betting will truly be transformed. The legislative fervour is such that, according to Benjie Cherniak, chief executive at US sports data provider Don Best Sports, regardless of how the PASPA decision falls sometime in June, the issue “isn’t going to go away.”

“The seeds have already been sown and there is an appetite for legislation in state capitols across the Midwest, the southwest and even the Bible belt. There is simply too much momentum to turn the clock back and take the sports betting equation off the table altogether,” he says.

Moves have been made in West Virginia, Maryland, Kentucky, Michigan, Iowa, Kansas, Oklahoma and Mississippi. With Indiana and Ohio being the latest states to be added to the watchlists, it is clear the list is only going to get longer the closer we get to the SCOTUS decision, likely within the next four months.

No wonder, as Cherniak suggests, developments away from the big states on either coast is gaining more “significant” attention. “Recent developments in Iowa, Indiana, and Mississippi put these states in the national spotlight as it relates to the sports betting debate,” he says.

Neale Deeley, the vice-president of sales for Sportradar in the US, agrees that the attention being given to the developments at state level in many previously unheralded states has engendered an unprecedented degree of enthusiasm. “The whole industry is alive to what is going on in many of these states and many operators are already quite advanced in their plans,” he says. “We have been seeing evaluations taking place at a company level.”

National significance

It isn’t just the number of states that indicates the degree of progress that is now being made. The debate is also maturing and this will have implications far beyond each individual state’s borders.

One such discussion comes with the attitude of the sports bodies with regard to what they are calling an “integrity fee.” The issue first arose at the turn of the year when the politicians crafting a potential bill to allow sports betting in Indiana – should PASPA fall – consulted with the National Basketball Association (NBA) and Major League Baseball (MLB) and came up with a plan to levy a 1% fee on all betting turnover.

This was the first time that either league had been consulted on sports betting legislation and the result was some stinging words from the American Gaming Association (AGA). In his initial responses to the news, AGA president Geoff Freeman said the US gaming industry’s main lobbying body was “not going to sit back and idly watch what we believe to be ridiculous proposals.”

In a conference call to discuss recent sports betting legislative developments across the US at the start of February, Freeman suggested the AGA has subsequently entered into further discussions with the sports bodies – who, it shouldn’t be forgotten, are on the other side of the New Jersey/PASPA case.

Cherniak points out that an integrity tax as proposed in Indiana would be “untenable” as it would potentially represent circa 20% of net gaming revenue. “By contrast, Iowa’s proposed bill does not include the one percent integrity fee, and accordingly faces opposition from the NBA,” he points out. “The integrity fee conundrum becomes a key theme to keep our eye on as more states prepare for a post-PASPA landscape.”

Still, Freeman at the AGA remained tight-lipped about how the discussions are faring. “We’ve had discussions with the leagues following that,” he told the conference call audience. “We understand their point of view, and I’ll leave it at that for the time being.”
The arguments over an integrity fee don’t come because of a lack of effort at education. Deeley points out that Sportradar has been working with some of the major sports bodies for many years with regard to data.

The company has a major provision agreement with the NBA, for instance, and also organised an event in Washington DC in November which brought together sports bodies and federal and state legislators to discuss how sports betting could be introduced in with the appropriate controls and safeguards.

“We have done a lot of work with the big leagues about integrity issues, and now we are increasingly talking to legislators at state level,” he says. “We are working to explain across all levels how systems can be provided which can ensure that all legitimate concerns can be laid to rest.”

According to John English, managing director of the sports betting and technology division at US leisure consultancy Global Market Advisors, while the involvement of the sports bodies is “extremely important”, he doesn’t believe they should be involved in negotiations regarding state-by-state regulations.

“Nevada has set a high bar when it comes to regulation and the leagues have had no involvement in drafting rules and standards outside of conflict of interest issues,” he says.

The issue that the leagues have to understand, he continues, is that by legalizing and regulating sports betting, it can only help with the effort to eradicate issues around match-fixing and potential illegal activity. Moreover, the benefits brought by increased legal betting activity also bring a direct economic benefit to the sports via increased interest.

“States need to know that sports betting is a volume-based business with low margins and high overhead and legal bookmakers essentially absorb a lot of cost in promoting the leagues and their teams,” he says. “It’s a benefit they have enjoyed for many decades and it comes at no expense, in fact driving enormous amounts of simulcasting fees.”

Plugging budgetary holes

As the debates in Indiana and Ohio suggest, while states’ rights issues are at the center of legal arguments back in Washington, when you get to the individual state legislatures the progress of the various bills is more clearly a fiscal matter.

Deeley from Sportradar says it is the tax angle that is the most important factor for the politicians. “The numbers from how the online market in New Jersey developed provides all the evidence you need that gaming expansion such as is being proposed in many of these states can generate additional tax revenues and I think a lot of states are looking at that and thinking that looks like a smart move,” he says.

Ed Andrewes, a consultant working with Resorts Digital Gaming in New Jersey, concurs that New Jersey now acts as a “great example” of what can be achieved when a “sensible” tax rate works in tandem with pragmatic regulation. The state’s experience now plays into the states hopes for future revenues from sports betting. “I think everyone has learnt from the experience of online casino and poker and all the estimates I have heard for sportsbook seem sensible and realistic,” he says.

Estimates for what the size of the opportunity in the various US states might be vary (wildly in some cases) but what is clear is that no one should be getting too carried away about the opportunity in some of these smaller states.

Gambling Compliance Research Services (GCRS) has published estimates for the US for key state-by-state scenarios. It suggests as its central prediction that up to 25 states are likely to open up to sports betting by 2025 and predicts that the gross gaming revenue (GGR) generated at maturity after five years would be in the region of $2bn.

Chris Krafcik, research director at GCRS, adds his central projection is that only a small number of states – Delaware, Mississippi, New Jersey, New York and Pennsylvania – will actually move straight after any positive court ruling.

Should that be the case, the potential GGR figure at maturity would be $770m. Add in the existing Nevada sports betting market, and the total US sports betting market would be worth a minimum of $1bn, but according to GCRS’ own forecasts, in a bull-case scenario with extra states, it could be worth $5bn-plus.

Over land and see

Such potential is inevitably causing attention to turn to who might make up the runners and riders in the states that do open up. Krafcik notes it is the “two-part issue” of who gets authorized and who gets control of the market that “perennially divides US gambling industry participants”, and which will dominate the debate across many of the states.

Research produced recently by Spectrum Gaming shows that a handful of the states already pushing for sports are also land-based casino markets, including Oklahoma, Iowa and Michigan. In such instances, the likelihood is that any future sports betting markets might well be centered around casino venues while in other states, it might be existing land-based racetracks that are given the nod.

Where online might fit into the picture in any of the prospective states provides for further complications despite its obvious appeal from a broad-based revenue and tax perspective. “It is too early to say whether state-level online gambling expansion will be helped, harmed or otherwise by the wave of state-level sports betting legislative activity that has already started,” Krafcik says.

For anyone who has followed the somewhat glacial pace of state-by-state online regulation in the US, this comment will come as no surprise. But as Cherniak points out, the patchwork nature of the nascent US sports-betting market bears resemblance to what has happened in Europe.

“Rather than one unified market, operators would be best served to view the US along the lines of how they view Europe, with each US state representing a different European country,” he says. “Some will regulate, some will not, and the regulatory model will vary from one state to the next. Over time, we will hopefully see convergence, but it will take time and require some level of maturation.”

As Deeley points out, to negotiate the various market openings, both operators and suppliers need to be supple in their approach. “You have to be aware of the reality on the ground in places such as West Virginia or Ohio. That is achieved by talking to the regulators and the potential legislators. It’s a learning exercise for both sides of the table.”

Some are better placed than others in this respect. English points to the established US presences of William Hill (in Nevada) and Paddy Power Betfair, which owns the race betting concern TVG. But he believes others will be enticed. “The potential to win back a percentage of the illegal market would be a great opportunity for anyone looking at the US market,” he predicts.

Naturally, such chatter leads to thoughts about the potential for a federal solution for US sports betting. But one of the politicians leading the way for a state solution in West Virginia is sceptical and points out that state level progress is much more likely than federal action.

“The federal government isn’t exactly known for getting things done,” says Shawn Fluharty of the West Virginia House of Delegates. “In West Virginia and other states, we have taken this issue and prepared ourselves to implement sports betting in a timely manner. States should not have to wait for the federal government to act. They’ve been waiting since PASPA was enacted.”

The politics of America plays a part. Much as with the flyover states themselves, sports betting is an often overlooked issue and is far down the agenda.

Although the most favorable way to legalize sports betting would be through a federal framework, it is unlikely to happen in the short term, says English.

“There are a lot of big topics on the agenda in America at the moment, including healthcare, immigration, infrastructure, and other reforms; passing a federal law for sports wagering immediately or any time in the short term does not seem to be the next big priority.”

And yet, the more attention sports betting gets in places such as West Virginia and Ohio, the more attention the issue might get from the Trump White House. It could happen here, to paraphrase Sinclair Lewis.