Industry strategic consultancy Regulus Partners begins the week by detailing three US states in which the realities of regulating sportsbooks and betting market dynamics have taken on a familiar narrative for industry stakeholders…
Three completely unrelated issues in three different US states have caught our attention this week, issues which demonstrate that expansion can go hand-in-hand with potential backlash and disruption. The US has so far been relatively insulated from the fiscal and social responsibility turmoil affecting much of Europe (and holding back expansion in Japan). There is a possibility that this may change, especially if US operators do not learn some of the more transferrable lessons from Europe (controversial, we know).
The first point of interest is the New York state budget, which factors in a very small level of sports betting expansion from casino sports lounges only to more broadly inside casino premises. Mobile wagering off-premise is not contemplated, but State Senator Addabbo hopes to persuade the governor to expand this provision to ‘full’ mobile betting before the budget is finalised in March.
On one level, we believe that Addobbo has a very clear point: NY citizens currently represent c. 25% of NJ sports betting (possibly more, unlikely much less), an annualised revenue of c. US$75m and tax of US$10m leaving NY and benefitting NJ. It is likely this will grow. But equally, we suspect that it will be a struggle to get NY legislators to care very much about less than US$100m in cross-border revenue and only c. US$10m in ‘lost’ taxes. Sports betting needs to stack up for NY on its own terms, not simply to plug such a paltry outflow. There is no doubt that in revenue terms, a relatively open NY mobile market will dwarf anything seen so far (we estimate c. US$1bn by year three, causing a material contraction in NJ). US$1bn sounds a lot: so far so good.
However, we see two problems. First, NY requires voter approval for gaming expansion. Some legislators argue that if servers are based in the four upstate casinos, where the bets are technically struck, there would be no gaming expansion. However, we struggle to see many judges accepting this technocratic ‘workaround’ vs. the common-sense view: being able to bet on sports anywhere rather than just inside four licensed premises is gambling expansion. We, therefore, believe that current NY proposals will face either a legal showdown (which the governor wants to avoid) or the need to persuade the public (which the governor may also want to avoid).
While the Colorado precedent is promising and NY is home to many liberals, bettors and sports fans (not all of whom will see betting as a good extension of their enjoyment), there is likely to be a vigorous debate (unlike in Colorado) and we may test the extent to which online gambling has broad public support. Here, the carrot of c. US$120m in additional taxes isn’t much for a state with a budget deficit of US$6bn – especially if the lottery (which contributes US$3.4bn to state education funds at 68% GGR equivalent inc. VLTs) feels under threat.
In other words, expanding mobile sports betting could trigger a significant and potentially rancorous political-public debate for not very much in the way of gain (essentially nothing to negative after the US$10m of lost NJ tax has been repatriated and the illegal market has been channelled). So far, betting interests have been winning battles mostly in ‘casino states’ (with intangible export benefits and a strong lobby) and/or in states where legislators can get behind the economic fallacy that a new tax means new tax revenue – without too much examination or an effective environment the ‘anti-expansion’ / ‘public health’ lobby: New York may well be different (as, indeed, may California).
Second, a teachers union in Nevada wants to create an upper rate of tax for the largest operators of 9.75%: essentially a 44% tax increase. On the face of it, this tax increase would seem justified given that the weighted average tax rate of commercial casinos in the US ex NV is 30%: 4.4x that of NV. However, NV is built on its intangible export market, not on the gambling activities of its domestic citizens.
Equally, the lack of licence restrictions means that Nevada is a highly capital-intensive market to compete effectively and structurally teeters on the edge of over-capacity, making it painfully cyclical from a bottom-line perspective. The proposal, therefore, threatens the nature of the goose that lays NV’s golden eggs and, if enacted, could have profound consequences for the US’s biggest casino market (e.g. it could very well knock it into second place behind California’s tribal casinos).
This fiscal challenge demonstrates the dichotomy between two axes of the casino business model: open licenses vs. restricted; domestic revenue base vs. tourists (whether out-of-state or international). NV (especially the big operators/establishments) sits aggressively in one corner these axes, meaning that its economics are completely different to any other US market (and most international markets). However, by the same token, a number of other US markets have looked to NV as a fiscal-regulatory model (wrongly, in our view) when considering sports betting; and now the fact that NV stands out from a casino fiscal-regulatory standpoint is being weaponised against it. When fiscal-regulatory policy is not understood in terms of its purposes and outcomes, the results can be dangerous: even in the US’s strongest ‘casino state’.
Finally, the US’s third-largest casino market is also under threat. Oklahoma’s 131 tribal casinos generate c. US$5.4bn of annual revenue, although not all is captured through exclusivity-based Tribal Compacts (Class II bingo-based slots and games are not). The terms of these compacts were flagged as dated by the tribes last summer as an opening gambit for renegotiation, but they were probably not expecting Governor Stitt to use the 2020 expiration to attempt to rebalance the amount of money going to the state (c. US$140m – so a low figure in absolute and relative terms) and also redistribute benefits among the tribes.
Perhaps unsurprisingly the key tribes (Cherokee, Choctaw, Chickasaw) resisted this and went to court. This week, the governor has upped the ante by demanding Class III gaming (RNG-based slots; US$2.3bn revenue, covered under exclusivity agreements) be stopped on the basis of unjust enrichment as no extant compacts cover them. Oklahoma is something of a Tribal Nevada: 131 casinos servicing a domestic population of 3.9m, explained largely by its proximity to largely gambling-free Texas.
Both the tribes and the governor, therefore, have a point: tribal contributions are not very big compared to tribal gaming revenue, but then they pull in materially more tourists and create more jobs than a sector designed around maximising tax is likely to produce, especially given the disparate (and so structurally ine0.fficient) nature of tribal lands as the starting point (as well as factoring in the original logic of allowing gaming exclusivity as something of an apology for the devastating impact of white settlement). Spats between tribal gaming and state governments are nothing new. However, these frictions are now occurring in a ‘post-expansion’ environment, where sharing the spoils is more ‘win-lose’ than ‘win-win’. This is likely to make fights more frequent, more belligerent and more damaging to the broader reputation of gambling in the US, in our view.
Across a number of issues, various key elements of the US gambling industry might be faced with challenging questions about the nature of gambling US states and citizens really want access to, and at what cost. The lesson from Europe is that these debates rarely end well for gambling – especially if they are unprepared (in both senses) to explain their role as a public benefit, or if they simply look (or are) self-interested and exploitative. Sharpening fiscal-social responsibility capabilities across the pond is likely to become increasingly important to sustainability, in our view – but it is also likely to throw some highly illogical or poorly understood policies (which often significantly favour incumbent operators) into stark relief.