Cookie-cutter laws: Why aren't states following the models that work?

The second you step off the train at the NJ Transit station in New Jersey’s Hoboken, you can’t fail to notice adverts promoting DraftKings’ sportsbook app plastered all over walls, pillars and fences around the platform. With New York bettors flooding into New Jersey, where sports wagering is legal, to place bets on their smartphones and watch games in sports bars, the Boston- based operator wants its brand front and center.

Anecdotal evidence suggests many are hopping across the Hudson River purely to get their bets on with any of New Jersey’s many regulated apps before turning around and heading straight back to Manhattan.

“I have been on the ferry at Weehawken and seen people get off at lunchtime, tap on their phones, get back on the ferry and go back to New York City,” says Gene Johnson, executive vice-president of Victor Strategies.

In fact, FanDuel revealed last year that 25% of its New Jersey online bettors had registered with New York addresses. So, by restricting sports betting to New York’s four upstate casinos, the closest being over 100 miles from NYC, and not (yet) permitting mobile, the Empire State is missing out on a tidy sum of tax revenue.

View of Manhattan from the air from a medium distance

Data produced by Eilers & Krejcik Gaming (EKG) estimates New York lost over $6m in sports wagering tax revenue in 2019 to its neighbor due to the absence of mobile. This could rise to $11m by 2022, EKG predicts. New Jersey’s online sportsbooks, of which there are currently 17, and its brick-and-mortar sportsbooks are happily cashing in on the situation.

Since June 2018 when the first bet was taken at Monmouth Park, New Jersey’s sportsbooks have generated $6.3bn in handle, resulting in revenue of almost $450m and over $53m in taxes collected.

Without mobile, New Jersey wouldn’t have achieved anything like these figures, nor the $540m in handle for January, of which over 87% came from online and mobile bets. It’s an attention-grabbing percentage for state lawmakers to ponder when considering bills without unfettered mobile wagering in a bid to protect the interests of the land-based industry.

“If you’re a casual gambler who just wants to have 20 bucks on the game on TV, then you’re not going to drive even 20 minutes to a property, let alone two hours,” says Ed Andrewes, CEO of Resorts Digital Gaming, the online arm of Atlantic City’s Resorts Casino Hotel.

Friction burns

Since PASPA was deemed unconstitutional and repealed in May 2018, there’s been a patchwork of sports-betting legislation introduced in the 20-plus states that have passed laws (14 are up and running at the time of writing).

Certain states, like New York and Mississippi, went down the retail- only route, although on-site mobile wagering is allowed in the latter, while a couple have opted for the much-maligned in-person registration model, which follows the Nevada model that has been in place since the first apps launched there a decade ago.

Incidentally, Nevada recently broke down the split in handle between retail and mobile apps for the first time, and it showed mobile accounted for 49%, or $246m, of total wagers in January. Rhode Island’s regulations also include in-person registration at its two casinos, which explains why mobile accounts for a disappointing 20% of handle in the Ocean State.

Iowa’s laws also feature in-person registration, although only for the first 18 months, meaning this stipulation ends in January 2021. Neighboring Illinois, which boasts over four times the population of Iowa (12.7 million compared with 3.1 million), will also require in-person sign-ups for the first 18 months.

EKG, in collaboration with Victor Strategies, recently undertook a study on behalf of trade body iDEA Growth into sports betting in Iowa to gauge the ramifications of in-person registration. Included was a consumer survey of active sports bettors and those considering placing legal bets in Iowa in the near future.

It found that 35% of respondents said the in-person registration process was somewhat or very inconvenient. Furthermore, 13% of those quizzed said they would not drive to a casino to open an online account.

That represents 96,000 of the approximate 740,000 potential bettors in Iowa, EKG projects. The upshot was that EKG said this kind of requirement is likely to significantly restrict the revenue potential of legal online sports betting, and restrict the competitiveness of legal markets and tax collected.

“The more difficult you make it with the registration process, the less likely they are to participate,” Johnson tells EGR North America. “I think that we’ll find when the [in-person registration] period is over and people can register directly, there will be an upsurge in betting activity in Iowa.”

Law and disorder

It’s not only the rigmarole and friction point of in-person registration that can constrict legal sports betting, though. For instance, Montana’s soon-to-be-launched market will allow mobile betting, albeit with a tethered offering that only lets wagers be placed at businesses with a liquor license and approved by the Montana Lottery Commission to install a Sports Bet Montana kiosk.

Elsewhere, there is the exorbitant 36% GGR tax in Pennsylvania and the eye-popping $20m sports-betting license in Illinois for the three permitted standalone online sportsbooks, as well as, peculiarly, Tennessee’s regulations insisting on a mandatory 8% hold when the industry goes live (Tennessee is now considering a mandatory 5% hold).

Tennessee is in a unique position of not having any brick-and-mortar casinos or racetracks and therefore doesn’t have any other state to use as a guide. Even so, stipulating that operators in this online-only market have to pay no more than 92% of handle back to bettors seems a tad unnecessary.

On the other hand, it’s better than the perverse 15% hold that was originally proposed, not to mention a bizarre idea (later ditched) that a push on a parlay results in a loss.

“They’re making it more difficult than it needs to be, and potentially harming [the market] in the process,” says Cal Spears, CEO of Better Collective Tennessee. Spears says Tennessee settled on a 92% pay-out cap to prevent certain operators from coming in and offering books with razor-thin margins.

Yet this percentage is near to the “natural” average of 93% nationwide, so it makes you wonder why it wasn’t scrapped altogether. Spears continues: “What’s likely to happen is what we’re seeing in New Jersey where you naturally end up with 93%, 94%, or maybe 92% like in Pennsylvania, without having to scare off any operators from having to manage a book and make sure that you end up with this mandatory hold.”

A numbers game

Perhaps the most widely criticized aspect of regulated sports betting so far is aimed at the handful of states that have restricted competition by having their lotteries involved in sports betting. These include Rhode Island, Delaware, Montana, Oregon, as well as Washington D.C.

Where monopoly operators exist, there is little incentive to offer attractive lines and player promotions, critics argue. Broadly speaking, the lure of a sole lottery operator with the promise of all profits going to state coffers blinkers lawmakers to the fact a state-run monopoly will often result in less income than the taxes collected from an open and competitive market.

“The temptation to let the existing lottery contractor take over sports betting has been responsible for the overwhelming majority of sports betting failures thus far,” remarks Charles Gillespie, CEO of Gambling.com Group.

“State lawmakers are told that they can save the fuss of regulating a sports-betting industry with multiple operators by going with a sole-source lottery contract, but these lawmakers fail to understand that a single product, which is pedestrian at best, isn’t going to excite the sports betting public.

These products fail to capture customers from the offshore market and don’t come close to generating the revenue that would come from a competitive regulated market.”

In fact, the Oregon Lottery is projecting a loss of $5.3m from its SBTech-powered Scoreboard betting app for the first nine months of its financial year, which is quite some achievement for a monopoly operator.

For Johnson, state lottery-run sports-betting operations are doomed to fail in the long run. “Lotteries are quasi-government organizations that are accustomed to longterm contracts, high holds and monopolistic markets.

They are unsuited to do business in competitive markets and often cannot offer the type of marketing and promotions that will effectively migrate offshore bettors to legal channels.”

Shining star

Last September, retail sports betting got underway in Indiana just in time for the NFL season, followed by mobile in early October. With legislation that appears to be modeled on New Jersey’s, Indiana has a reasonable 9.5% tax on GGR and enough skins on offer to create a vibrant market.

More importantly, players can open accounts and bet using mobile devices from anywhere inside the Hoosier State. “The shining sports-betting star of 2019 legislation was Indiana,” Gillespie asserts. Although Indiana was pipped to the post in the Midwest by Iowa’s launch, Indiana has since run rings around Iowa.

In January, Indiana’s handle for retail and mobile combined increased 5.6% month-over-month to $170.8m, yet Iowa’s fell by 2.1% to $58m. In addition, mobile accounted for 72% of handle in Indiana compared with 58.3% in the Hawkeye State, underscoring once again the effects of in-person registration.

Other states you could single out for sensible legislation include West Virginia, with unfettered mobile laws, a low tax rate (10%) and the option for 15 online brands, as well as Michigan, which passed legislation in late 2019.

Johnson says: “It’s early to say this, but Michigan has passed high-convenience sports-betting measures, and it has involved the commercial and tribal casinos.” If certain states can create laws conducive to a prosperous market that maximizes taxes, you have to question why lawmakers have fumbled the ball elsewhere.

Why not simply copy the New Jersey model with fully remote account registration, a reasonable tax rate and a market that, in theory, permits up to 42 online betting brands?

Johnson responds: “The legislation has to be in the best interest of the states’ citizens, not necessarily the sports-betting industry. Having said that, I think New Jersey has done a great job with their open model.” However, he points out that while the Garden State has maximized revenue, the brick-and-mortar casinos have ended up marginalized.

“The big winners in this have been the tracks, primarily Meadowlands, and the operators which are progressing the best, the DFS duopoly [FanDuel and DraftKings].”

Offers offshore

Ultimately, if a regulatory model does not provide competition to the illegal offshore sites then bettors won’t have much incentive to bet through legal channels. It’s also about hitting the sweet spot of creating an open and competitive market that generates the highest possible tax revenue.

Gillespie warns: “States don’t have to reinvent the wheel to regulate sports betting; they just need to follow what works and not succumb to the empty promises of sole-source lottery contracts.”

As for New York, the state’s Governor, Andrew Cuomo, has been lukewarm to the merits of online wagering, which means New Yorkers seem set to continue crossing the Hudson to place legal bets, at least for the near future. New York’s loss remains New Jersey’s gain.