Winning Post – PASPA… One year on

A year following PASPA’s downfall, Industry strategic consultancy Regulus Partners details why the US market has delivered in value and expectations for all betting incumbents…

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A year on from the Supreme Court’s historic overturning of PASPA and there are no suggestions so far that expectations will be disappointed. On a run rate basis, the US sports betting market has already more than doubled in size to over US$650m, with another significant boost due shortly when Pennsylvania launches online and legislation passes in other states.

More than one-in-ten US adults already have in-state access to regulated sports betting in some form and growth here is also set to continue. Federal and state governments are generating c. US$100m in additional taxes – mostly incremental at this stage – and every vaguely connected business and stakeholder is lauding the unfolding strategic opportunity. So what have we learnt, and what can we expect?

First, and completely unsurprisingly except for some state budget expectations, mass distribution is key for scale – and in the absence of kiosks in every convenience store, this requires online/mobile. A big question, however, is whether states and operators have got the marketing and social responsibility measures right to keep the cat out of the bag. As demonstrated in Europe, aggressive exploitation of ‘new’ channels can cause regulatory backlash faster than US regulatory approvals can take….

Second, having an engaged customer-base to convert provides a compelling strategic advantage. Again, this is pretty obvious, but so far the winners have been DFS operators and venues next to big urban conurbations. Obvious it may be, but this leaves a number of stakeholders – casino operators especially – dangerously exposed in terms of ‘easy’ access to market share, in our view.

Third, US bettors like in-play too. Again, statements of the obvious continue, but this was against the predictions of some domestic incumbents and significantly ratchets up both the operational sophistication needed to develop a strong product. It also enhances the position of the sporting bodies, given that in-play requires data which needs to be as real-time as possible and this can be hard to get without their cooperation (a commercial lever that operates regardless of ‘integrity’ fees). US sports are also aggressively seasonal (see NJ April figures, and especially what is likely to come), meaning operators might look increasingly to ‘shoulder products’ (e.g. soccer and tennis) to fill the gap, especially for more engaged customers and where online gaming is limited or non-existent (nearly everywhere).

Fourth, tax needn’t be taxing – so far. With a few exceptions, states are choosing the ‘Nevada / New Jersey’ model over the ‘Pennsylvania’ model (average tax rate of legislated states ex RI, PA, DC, MO and DE is 9.3%, 17.6% including Federal handle tax). While the short-term benefits of this to sports betting operators are plain to see, we believe that it (along with under-developed social responsibility measures) might be storing up problems for the future. Low tax rates in NV and NJ are based around taxing tourists (intangible exports) – if domestic consumption is the target, then low tax rates simply shift capture (after the black market is soaked up) rather than raise taxes. Should this occur visibly (or, worse, reduce lottery scratchcard / landbased revenues through cannibalisation which are in state budgets), then the betting lobby could start to lose important friends.

The type of state that can easily regulate is also pretty clear (with inevitable exceptions): it has a material commercial casino presence (i.e. a ‘pro’ lobby) and either no Tribal presence or a retail-only approach. It also has no constitutional/public consultation barriers to expansion. Racing as a lobby has been curiously muted (and sometimes cut out unless ‘racino’, possibly due to a more ambivalent view of the ‘opportunity’). The consistency of these characteristics, especially when it comes to online expansion, is potentially significant as a material break on broader ‘second wave’ adoption (it is telling that the Seminoles are flexing their muscles on an unrelated topic this week: withholding US$7m of funds to the state per week over racino cardroom competition – this dwarfs anything commercial sports betting can offer).

All of the above means that a year in, while there are now 12 sports betting states in the US, there are really only two functioning markets (one of which is pre-PASPA), with a third going onstream shortly (albeit with an eyewatering cost of entry). Equally, only two operators are clearly taking market share, but largely built on what could be short term competitive advantages. Further, there are considerable political-regulatory hurdles for many states to overcome, while the passage of legislation by no means limits fiscal-regulatory risk – indeed in some instances this could be being created.

The US has made a lot of progress and promises more to come, but the signs of strategic salvation for any material stakeholder (commercial, supplier, state treasuries) are far from certain…

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