Could States Share Sports Betting Liquidity Despite Laws?

January 10th, 2019

Could States Share Sports Betting Liquidity Despite Laws?

Though a sweeping federal sports betting bill seems increasingly unlikely to pass, that hasn’t prevented gambling industry stakeholders from pushing for a nationwide partnership they consider vital for the fledgling U.S. market.

Since the Supreme Court struck down the federal ban on sports betting earlier this year, states have had autonomy to legalize wagering and subsequently tax and regulate it at their own discretion. All eight states taking bets, as well as nearly two-dozen more considering doing so, have legalized this form of wagering with different taxation, implementation and regulatory structures.

Though leading industry advocates such as the American Gaming Association prefer the patchwork, state-by-state model, it does lead to disadvantages available in a nationwide model. The recently introduced federal framework includes language to repeal existing laws that prohibit an enlarged player pool eligibility – and, subsequently, a major new potential revenue source.

Many gambling officials believe Interstate player pooling is essential for American sports betting to thrive. It is not so much an issue in major gambling states like Nevada and New Jersey, but could manifest itself in smaller states with legal sports betting like Mississippi and Delaware.

Most of states with legal sports betting, or those set to do so, fall into the later category. While Nevada and New Jersey see hundreds of millions of dollars in wagers monthly, most of the other states with legal wagering see totals closer to around $10 million in bets during the same time period.

Some industry observers fear smaller markets could be derailed without a player pool capability.

”We can make it work well, but having 30 different regimes is not going to make it work,” said Kate Lowenthar-Fisher, an attorney and chair of the Gaming and Hospitality Practice Group.

Legal Structures Handicap Sports Betting Potential

Currently, players must be within state lines of eligible jurisdictions to place a legal bet, and in most states must be physically within a casino or other licensed gaming entity. This dramatically restricts the ability for gambling purveyors, as well as state tax collectors, to generate money.

One solution is what one some industry officials call a “hub and spoke” model. That would include a “hub” in a state like Nevada or New Jersey that could have satellite affiliates or “spokes” emanating from the central point. This would create a liquidity sharing agreement, where players in one eligible state could play through games from entities located in other partner states.

In this scenario a leading gaming purveyor could have a headquarter set up in one state, and then allow players from any other eligible state to use their games and services, thereby expanding each company’s pool of potential consumers. This could also help consolidate and streamline regulatory processes as well as overhead costs as a new wave of states considers legalizing sports betting.

This could also help mitigate risk for the sportsbooks, which see margins of around five percent, the lowest of any major gaming offering at a typical casino.

An unusually popular bet, such as when Nevada residents raced to place bets on their hometown Las Vegas Knights during the team’s unexpected run to last year’s Stanley Cup Finals, could devastate even larger, established sportsbooks.

A similarly unexpected run in a smaller state by a popular hometown longshot, such as the University of Mississippi or Mississippi State football teams in their home jurisdiction, would have an even more detrimental impact on a comparatively less lucrative sportsbook.

Furthermore, an underserved pool of players would cripple sports betting markets before they get off the ground, Lowenthar-Fisher told a group of gaming industry officials and state lawmakers at a conference last week. The inherent difficulties of operating and profiting a sportsbook would be all-but-impossible without some sort of nationwide partnership.

“Otherwise, It’s a slim-margin business,” Lowenthar-Fisher said during last week’s meeting of the National Council of Legislators from Gaming States (NCLGS). “We can’t layer overhead and fees and taxes in small markets. It gets killed before it gets off the ground.”

Under current law, these affiliates in different states could share best practices, security concerns and some other customer information, but would be unable to take bets or transmit money won on sports betting wagers across state lines. To do so would require adjusting federal law.

How a 1960’s Law Prohibits Interstate Sports Betting Online

Interstate sports betting pooling is now illegal due to the Interstate Wire Act of 1961, better known as the Wire Act in gaming circles. Proposed as a way by the Kennedy Administration to combat organized crime, it enacted broad restrictions of transmitting bets or wagers across state lines and specifically prohibited interstate sports.

Enacted decades before the internet’s creation, it was nevertheless used as the basis to prohibit wagering across state lines through the web until 2011, when the U.S. Department of Justice said it did not apply. Still, specific sports betting probations through all mediums remained in effect, including the internet.

Before the Justice Department decision, the Bush Administration took a more proactive approach to online poker, which didn’t exist during the creation of the Wire Act. Signed into law in 2006 as a rider to a largely unrelated measure regulating port security, the Unlawful Internet Gambling Enforcement Act (UIGEA) would see the end of what had been a booming online poker market in the U.S.

In 2011, U.S. attorneys cited the UIGEA when seizing several high-profile online poker sites, shutting them down for violating the law by transferring funds between states. This effectively ended paid online poker sites.

However, the UIGEA did provide a lifeline that gaming industry observers now believe could provide the blueprint for a nationwide sports betting player pool agreement.

Interstate Compacts Emerge in Other Gaming Entities

Though it prevented interstate gaming, the UIGEA did specifically allow any two or more states with legalized online poker to pool players. Nevada and Delaware, the first two to legalize online poker within their own borders, formed the Multi-State Internet Gaming Agreement in 2014.

New Jersey joined in 2017 and Pennsylvania is expected to do the same once it opens its legal online poker market later this year. Other states considering online poker for money, most notably Michigan, would also be likely candidates to join the compact.

This could give each market a combined pool of more than 35 million players, assuming each jurisdiction approves its own laws and joins the agreement. Sports betting pooling player advocates hope for a similar arrangement.

As poker looks to this model to recover, other gaming industries have likewise been given new life, and in some cases thrived, once exempt from government pooling restrictions.

In the 1970’s, lawmakers carved out an exception to the Wire Act to specifically bolster the horse racing industry and prop up state budgets, which at time used racing as a much larger tax revenue source. Though in-person horse racing patronage, and subsequent government revenues, have declined precipitously due to a downward cycle of dwindling track attendance and increasing closures, this is much of the reason horse racing has been able to survive.

Now, an estimated 85 percent of revenues are via bets on simulcasting through out-of-state tracks, which Florida gaming law attorney Marc Dunbar said keeps them solvent.

”If not for the ability to move the money through an interstate fashion, you would have no industry,” Dunbar said during the NCLGS conference.

The lottery may be the best example of the revenue potential of liquidity arrangements in a thriving industry.

Likewise exempt from the Wire Act and the UIGEA, America’s two most high-profile lotteries in Mega Millions and Powerball began pooling players from 44 eligible states as well as the District of Columbia and the U.S. Virgin Islands in 2010.

This has dramatically increased the possible payouts, which in turn has sparked an increasing number of players and is much of the reason why the ticket for largest-ever lottery jackpot of more than $1.5 billion dollars was sold last year.

While these caveats around the Wire Act have bolstered much of America’s gaming industry, the sports betting prohibition remains. With gaming purveyors and supportive lawmakers likely to increasingly clamor for interstate pooling, it will remain up to members of Congress to adjust a law passed long before any of them took office.

Will a Wire Act Repeal Happen?

Unfortunately for gambling stakeholder and would-be bettors, any Wire Act repeal faces a tough challenge.

Congressional lawmakers have laid out their initial version sweeping regulatory framework, one that includes a Wire Act modification for interstate pooling. However, the bill has lost co-sponsor Orrin Hatch, who retired earlier this month, and has gained little momentum on Capitol Hill since it was introduced last month.

Already facing a government shutdown and a number of other high-priority issues, Congress is unlikely to prioritize a measure that has largely escaped the public’s consciousness. Meanwhile increasing polarization on Capitol Hill has made passing legislation more difficult than ever, especially for something that may prove controversial for lawmakers from states with or without sports betting alike.

Even gaming advocates largely oppose the bill despite the Wire Act amendment, opposing its broad federal requirements of all states considering legalization that many find anathema. For now, It also seems unlikely at this point for a Wire Act amendment to come without other regulations so far supported by Congress.

Still, the Supreme Court’s decision to repeal the federal sports betting ban was unexpected itself. Seemingly impossible just a few years ago, the repeal has sparked hundreds of millions of bets already across eight jurisdictions and is set to be joined by that many more states later this year.

If bullish projections hold true, the majority of Americans can access a legal sportsbook in the next few years, furthering underscoring the momentum behind sports betting. As it is expected to take a larger role in the American zeitgeist, appeals to broaden the industry’s revenue potential will undoubtedly increase.

Already, gaming stakeholder believe an interstate pooling agreement is a pivotal way to reach that potential.