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Top 5 Tips for State Gaming Regulators

Published: July 13th, 2018, 16:00pm CEST

This weekend Cleveland plays host to the summer meeting of the National Council of Legislators from Gaming States, or NCLGS. While NCLGS meetings always draw a premier group of policy-makers and industry experts, this particular conference takes on a whole new level of importance as the first such gathering since the Supreme Court’s Murphy v. NCAA decision opened the door for states to start offering sports betting. With many states already well underway in the process of developing sports betting policy and many more, including Ohio, preparing to take the leap, I expect this topic to dominate the conversation at NCLGS.

US lawmakers should take a long look at the lessons to be learned from the European market, where sports betting has successfully existed for decades. If states want to reap the benefits of tax revenue and job growth, they must consider policies that will allow the sports betting industry to operate free of unnecessary burdens and compete with the strong offshore sports betting market. To be clear, sports betting is not a new phenomenon in the US, but legal sports betting is. The goal of every state should be to maximize their ability to draw existing customers away from offshore sports betting operators and towards legal, regulated and taxed sports books. In order to accomplish this, the following top five principles should be considered as the foundation of any successful online gambling policy.

1. US Online Gambling is Only a $3 Billion Industry. Tax it Accordingly

There is significant misinformation circulating about the actual size of the online gambling industry in the US. Many media outlets have been reporting outlandishly high estimates of potential US revenue, or worse, confusing revenue with handle, the total amount bet. As illustrated below, sports book gross revenue is only around 5% of the total amount bet. So while sports books may handle large amounts of money, at the end of the day their revenue is far less than what is being reported. Lawmakers need to understand that sports betting is a relatively small industry in the US with total 2017 revenue of approximately $3 billion (according to PwC and including the offshore operators), not a $150 billion juggernaut as some have erroneously reported. It is important that lawmakers fully understand the real size of the industry as the amount of regulation and taxation which is relevant for a $3 billion industry is completely different than the amount that is relevant for a $150 billion one.

Sports betting itself is a very low margin enterprise, much lower than slot machines, table games or even lotteries. Over the last decade, Nevada sports books have averaged around 5% margin, meaning that for every $100 bet, the sports book can expect to retain about $5 and pay out the rest as winnings. Of that $5, sports books must be able to cover their expenses, including overhead, taxes and regulatory costs, leaving rather small margins at the end of the day. It’s no surprise that Pennsylvania, with a sports betting tax rate of 36%, on top of multi-million dollar up front licensing fees, has yet to see substantial interest in their licenses. Meanwhile, New Jersey, which has imposed a far more reasonable 8.5% tax on (land-based) sports books (13% online), has made far more progress in attracting operators.

2. Allow Online Gambling

Some states are considering the antiquated policy of limiting sports betting and other forms of gambling to existing brick-and-mortar casinos and racetracks. Online gambling is fundamentally an information technology and ideally suited to be conducted online. By not authorizing online gambling, gaming regulators are leaving the fastest growing segment of the market entirely in the hands of the offshore operators. This in turn severely limits the amount of tax revenue they could be collecting. Today’s customers demand convenience and few will be willing to make the drive to a casino simply to place a simple sports bet when they can do so online. Customers in these states will still place sports bets, but they will continue to use the convenient services offshore online gambling operators, generating no revenue for the state.

The skills required to launch a modern, state of the art, online sports betting operation are technical and specialized. States who allow online gambling will not only be creating jobs in their state for this entirely new type of enterprise, but they will be creating a substantial number of highly-skilled jobs that come with six figure salaries. The economic knock on effects of this type of job creation are immense.

3. Regulate All Forms of Online Gambling, Not Just Sports Betting

Consumers will be bewildered by a state’s decision to allow sports betting but not online slots or other casino style games. The consumer has access to all of these games at their offshore gambling operator and expects to have everything available in one place from one operator.

As covered above, sports betting itself is not a big money maker. In a land-based casino the slot machines generate the most gaming revenue of any product. The same is true online. States will attract substantially more investment by allowing casino style games alongside sports betting. The higher margins from casino style games will help businesses justify the investments required to deliver a compelling sports betting product.

4. Grant Lots of Licenses and Do Not Limit Skins

Barriers to entry should be low enough to attract start-ups and businesses from outside of the state’s current gaming ecosystem. Policies that erect artificial barriers to entry will limit the dynamism of the market which ultimately means the consumers will suffer by only having access to sub-standard gaming options (unless they go offshore).

Online gambling regulation should be seen as an opportunity for new startups to grow and innovate, not a gift to a select few who happen to have the right connections. A truly progressive state which fosters easy access to the market for start-ups may help a new American company come to life which not only succeeds in the US but gives the European gambling giants a run for their money on their home turf.

Some state policymakers have taken steps to limit the number of licenses or the number of different entities or “skins” that can operate online under a single license. Again, this only serves to limit competition and consumer choice. Online gambling is an innovative industry that is driven by technology, with different companies specializing in different sports and different types of bets. As long as states dedicate enough resources to run background checks and regulate for a reasonable fee that covers their costs, there is no benefit to limiting the number of entrants to the market.

5. Put Consumer Safety First

State governments should always have the goal of protecting their citizens, which is something they cannot do in the shadows of the black market. State regulations must protect customers’ money, resolve disputes with gaming operators, ensure that minors cannot partake in gambling, and provide resources for people with problem gambling issues. Likewise, states should not work with industry entities who are not willing to operate by these standards or have shown a disregard for these principles in the past.

By looking to parts of the world where online gambling is already well-managed and successful, US policy makers can avoid a lot of the trial and error of starting from scratch. Attendees at NCLGS, Ohio lawmakers and those across the country will be well-served by keeping these top five principles in mind in the coming days and during future discussions to come.

Charles Gillespie
Chief Executive Group