Movers and SHAKERS
The Legalization of Sports Gambling: A Winning Bet?
(Note: related companies are at base of the story and all the sources listed in the "Balanced" section)
On Monday, May 14, 2018, the U.S. Supreme Court made a monumental ruling to legalize sports gambling outside the state of Nevada, lifting the 25-year-old federal law. The rationale for this decision was to bring a multibillion-dollar industry into the forefront, allowing states to record tax revenues and encourage tourism. The decision is intended to protect consumers by increasing transparency between all parties involved. As of February 13, 2019, full-scale legalized sports betting is allowed in eight states, with bills pending in two additional states.
The American Gaming Association (AGA) estimates $150 billion is illegally wagered in the United States annually. This Supreme Court ruling presents an economic opportunity for corporations and entrepreneurs to compete for a share of this market. Assuming at least 40 states legalize sports betting, the AGA estimates the industry can generate $8 billion in local tax revenue, create thousands of new jobs, and add between $14-$20 billion to the national GDP.
The success of the gambling enterprise is founded on the simple principle that there will be more losers than winners. So, who will be the winners? And, who will be the losers?
And the Winner Is…
Proponents for the legalization of sports betting provide the rationale of an added revenue stream for states, while cutting into a market that has for decades operated illegally. Advocates also believe that federal legalization will allow for better control of sports betting consumption and for measures to be put into place to better address addiction. With this rationale, the legalization of sports betting may appear to be a win-win. However, who are the true winners?
Casinos are the most obvious entity to benefit from the legalization of sports betting. Morgan Stanley analysts estimate that by 2025 the total amount wagered on sports could increase to $216 billion up from the estimated $150 billion illegally wagered on an annual basis currently. $216 billion in wagers translates to about $11 billion in revenues, which by comparison is roughly equivalent to the total revenue generated from all 2017 box office movie sales in North America.
The legalization of sports betting in the U.S. could provide aid to struggling casino businesses. Although sports gambling is not the most profitable segment for casinos, it is a way to lure the public in and market their more profitable gambling options. It’s estimated that legalization of sports betting has the potential to add $2.9 billion in incremental profit for casinos nationwide.
Even sports, once heralded to be DVR-proof television, are no longer in the free from the fast-forward button. As more and more viewers are cord cutting, media and entertainment companies are looking for ways to increase the amount of time the audience tunes in. Legalized sports gambling could be the answer. If a viewer has a wager on a sporting event, they are likely to be more invested in the outcome of the game. As a result, networks can begin to see longer viewer engagement and better ratings. Sports betting platforms trying to differentiate themselves can target a more engaged audience resulting in new advertisement revenues for entertainment companies.
Everyone Wants a Piece of the Action.
Casinos, entertainment companies, and tax collectors are all positioned to benefit from legalized sports gambling, but questions still remain on how profitable these forecasted revenues will be to the parties involved. As more states draft regulations on sports betting, new variables that may hinder profitability have arisen.
Currently, states are allowed to self-regulate. However, it is unclear whether Congress will allow this to continue or decide to implement its own federal regulations and taxes on the industry. Before any state can reap the benefit of any taxable revenues each state is subject to licensing fees. For example, in Pennsylvania, a sports wagering license can cost the state upwards of $10 million. States may also face steep taxes, with proposed rates of 34% of the state take from gaming revenues with an additional 2% local tax.
Professional sports organizations are also weighing in for their piece of the action. Proposed integrity fees are a way for professional leagues to profit from the expected surge of sports betting. These fees are essentially a royalty from the state paid to professional sports organizations like the NBA or the MLB. The potential multi-billion dollars in integrity fees present yet another financial hurdle for states to overcome.
The trickledown effect of potential federal intervention, integrity fees, and higher tax rates on betting revenues could result in the customer receiving inferior odds. This may not seem significant to the recreational bettor; however, a more experienced gambler may revert back to offshore betting platforms as a substitute. Although more wagers will be attracted by legal sports betting, casinos will face stiff competition from racetracks, overseas operators, and new entrants including fantasy sports operators.
Sports Betting is Here to Stay.
Whether you believe gambling sullies the good nature of sports or you are one of the millions who love the adrenaline rush of a winning bet, sports betting is here to stay. As legalization efforts continue, sports gambling will continue to inspire debates on how to regulate and how to profit from this newly legal industry.
Supreme Court lets states legalize sports gambling, Ariane de Vogue and Maegan Vazquez, CNN, May 14, 2018.
State-by-state sports betting bill tracker, Ryan Rodenbery, ESPN.com, February 13, 2019.
Morgan Staley predicts sports betting will be big business, Josh Kosman, NY Post, November 5, 2018.
Odds favor bettor ad gains for networks, Mike Farrell, MultiChannel, July 9, 2018.
U.S. legal sports betting market projected to be worth billions more than previously believed, Eric Raskin, USBets.com, June 28, 2018.
MGM, casino stocks jump after Supreme Court says states can legalize sports betting, Gillian Brassil, CNBC, May 14, 2018.
Why the Sports Betting Industry is about to be a crowded race to zero margins, Will Yakowicz, Inc.com, May, 15, 2018.
The 5 biggest winners (and one loser) in the Supreme Court Sports Gambling Decision, Chris Smith, Forbes, May 15, 2018.
Economic impact of legalized sports betting, Adam Sacks and Aran Ryan, Oxford Economics, May 2017.
The economic benefits of legalized sports betting in the U.S. would be huge, Patrick Hauf, Foundations for Economic Education, August 31, 2018.