Will US bettors abandon their black-market bookies?

A recent survey found almost three quarters of US sports bettors would “shift some or all” of their betting activity to legal channels if they had the option, but is this a likely scenario or a tad over-optimistic?

When it comes to illegal sports betting, the US has perhaps the most entrenched black market in the world, after decades of prohibition in 46 of its 50 states allowed street bookies and unlicensed, US-facing offshore operators to thrive. The salient question now being pondered, though, is whether with the repeal of PASPA – the 25-year-old federal ban which pretty much restricted unfettered sports betting to Nevada – and with states gradually legalising sportsbooks, will these gamblers transition to legal options in their droves? Or, instead, will they stick to their deep-rooted modus operandi?

A study commissioned by the American Gaming Association (AGA) and undertaken by Nielsen Sports found that 71% of those quizzed who currently bet with a bookmaker would “shift some or all” of their betting activity to a regulated market if they had access to a legal platform. Meanwhile, 38% of the 1,032 adults Nielsen surveyed between 15 May and 31 May said they would switch to legal methods completely. On face value, these seem encouraging percentages for lawmakers, regulators and the sports betting industry, but it should be acknowledged that the question didn’t explain that states will have – and already have – varying regulations.

Upwardly mobile

For starters, these states bereft of state-wide mobile betting, such as Mississippi, which is home to 28 land-based and riverboat casinos, yet mobile wagering will be restricted to within gaming facilities, seem set to play into the hands of the illegal operators. According to the Nielsen study, 44% of sports bettors are under the age of 35, while 29% earn a household income of over $100,000 a year. Therefore, mobile betting is paramount to engage with this demographic, which means the states that force bettors to traipse to a casino or racetrack to place a bet will find themselves firmly behind the eight-ball.

Richard Schuetz, the former executive director of the Bermuda Casino Gaming Commission and ex-chief of the California Gambling Control Commission, stresses convenience is key to competing with the black market. “Consumers will flow to the channel that delivers the product with efficiency and value. The goal is to be able to deliver the product on a mobile app from wherever the bettor is, with the smooth processing of payments. The sooner that we get there, the sooner that the offshore operators and illegal bookies will find their markets threatened.”

Schuetz also stresses how offering consumers favourable odds will help to encourage them to use legal options. But when daily fantasy sports giants DraftKings and FanDuel recently expanded into sports betting in New Jersey, their initial ‘lines’ drew the wrath of clued-up bettors on Twitter. As legal competition intensifies, it’s expected that odds will improve, though. However, if those surveyed were told legal betting comes with no online option – or at the very least an intrastate mobile betting app – and betting lines include higher ‘vigorish’, the aforementioned 71% and 38% would surely plummet.

“Finally, American bettors get legal, regulated sports betting, but the odds are so bad it’s pretty much unusable for any bettor paying attention,” says Charles Gillespie, CEO of Group. “It felt like all of the optimism and positivity about the PASPA repeal was for nought and that proper sports betting in America would continue to remain just out of reach. It was, of course, a total overreaction. The odds have improved and will continue to improve as competition begins to show up in New Jersey.”

Going underground

The AGA estimates that the illegal market in the US is worth $150bn a year. While the true figure is difficult to ascertain, certainly tens of billions of dollars are wagered annually via shadowy underground bookies and online firms scattered across Costa Rica and the Caribbean. In the past five years there has also been an explosion in pay-per-head (PPH) bookmakers, whereby US-based ‘bookies’ operating illegally are paid a fee per client and those clients are extended credit to bet via an app. All wins and losses are tracked but, crucially, the sites don’t process any transactions – that’s all handled in cash by the local bookie. Eilers & Krejcik Gaming estimates PPH accounts for 35% of all illegal sports bets.

In order to compete with the illicit industry, much rests on the regulatory frameworks lawmakers deploy, especially the tax rate. In Nevada, where sports betting has been legal since 1949, sportsbooks are taxed at 6.75% of gross sports betting revenue. At the other end of the spectrum, Pennsylvania’s tax rate will be a wince-inducing 36% – more than five times Nevada’s rate. Then there is the small matter of licences costing $10m a pop in Pennsylvania, while limits on skins there means competition and consumer choice will be limited somewhat. We’ll know in the next couple of months how these regulatory hurdles affect the market once operators roll out their sports products.

Speaking more broadly about US sports wagering, Vic Salerno, an industry veteran with 38 years race and sportsbook experience in Nevada under his belt, doubts whether legal bookmakers can compete with the black market. “I know several non-regulated

bookmakers are celebrating. Twenty-five years ago, they thought – and it became true – that PASPA was the best thing that could happen to them and now they are celebrating again today at the repeal of PASPA because they know the regulated bookmakers can’t compete with them without reasonable taxes, licences, and so on.” He follows this up with an ominous warning: “I believe that there will be many bloody carcasses in the legal bookmaking industry in the next couple of years.”

The smart money

In all likelihood, sharp bettors will continue to place most or all of their action with the high-volume, low-margin offshore bookmakers (the Nielsen survey found 29% would not switch from their existing bookie). For the authorities, trying to block and/or shut down US-facing sites and PPH bookmakers looks a nigh on impossible task akin to ‘whack-a-mole’. New Jersey’s top regulator, David Rebuck, has talked recently about the need for widespread cooperation among regulators, payment processors and other agencies to tackle the problem. “One state can’t do it by itself, one agency can’t do it by itself,” he told Legal Sports Report. He also emphasised the need to educate the public on the difference between legal and illegal operators.

The big problem is that PASPA allowed the black market to flourish to a point of no return. In the UK, which has a regulatory framework commonly viewed as the gold standard, the country’s Gambling Commission reckons just 5% gambling takes place on the black market. In France, the oppressive tax regime partly explains why an estimated 40% of gambling is done using unlicensed operators. Harsh tax rates and other burdensome overheads in certain US states could lead to a similar situation as France.

For Gillespie, it comes back to the betting laws and, crucially, how consumers can place bets. “Certain states will not even have mobile, thus zero chance to compete with offshore and move any decent portion of the action onshore. Other states that get all the basics right, such as having mobile, sensible taxes and multiple skins to enable meaningful competition, will move virtually all of the action onshore.”

Meanwhile, Schuetz believes the US will be a massive learning curve with many adjustments in the legal and regulatory environment through “trial and error”, but, ultimately, the sports bettors themselves will shape the industry. “The consumer is the boss here, and the operators, regulators, and legislators need to understand that,” he states. “They can wish all they want, but the consumers will tell the market who they like.”