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IN-DEPTH 14 March 2017
A realistic opportunity to regulate sports betting in the US?
President and CEO of the American Gaming Association, Geoff Freeman, has stated that the next President of the USA will hopefully have the issue of legalising sports betting on their desk. Tom Lewis looks into the current prospects of efforts to allow Americans to have a punt on their favourite sports
By Tom Lewis

It was first reported by ESPN towards the end of October that a congressional committee is reviewing three major pieces of federal legislation that relate to betting, namely the Federal Wire Act 1961, the 1992 Professional and Amateur Sports Protection Act (PASPA), and the Unlawful Internet Gambling Enforcement Act 2006 (UIGEA).

Without wishing to stray too far into the dry and legally complex, the Federal Wire Act, following a 2011 Justice Department memo, outlaws wire communications relating to sports betting, UIGEA restricts financial institutions from processing gambling related payments, while PASPA, with a few exemptions, prohibits sports gambling under state law.

These three statutes, which all touch on the issue of sports betting in the USA, were pilloried as “obsolete” and “in desperate need of updating” by US Representative Frank Pallone Jr. as news of the congressional review broke in October, with Pallone looking to paint a picture of a set of regulations in need of “wholesale review to see how they can actually work together and create a fair playing field for all types of gambling.”

“This review is long overdue”, states David Schollenberger, who heads the Gaming and Leisure team at law firm Healys. “In a country where over half of the states now have casinos, the demand for gambling services and DFS is clearly high and ever-growing. Why should sports betting be left to the hands of unlicensed and untaxed operators? Rather than hiding its head in the sand, the US Congress should recognise the evolving tastes of modern society in the US to enjoy gambling in moderation. Its role should be to pass legislation to enable legalisation by states. State regulation should make it safe as possible for users, not to prohibit it as it did with alcohol in the 1920s.”

Pallone’s desire for change is certainly justified by the patchwork nature of federal statute law covering online gambling in the country, with his home state of New Jersey currently engaged in a Supreme Court battle to see sports gambling legalised.

Geoff Freeman, President of the American Gaming Association, has firmly laid his cards on the table on this issue, stating in 2016 that: “The next President is going to have the issue of legalising sports betting on their desk.” Freeman expressed optimism about working with the Trump administration in particular, noting the new President’s leaning towards the Republican championing of small government and states’ rights, registering hope that the Trump administration will offer “significantly more restrained federal agencies than what our industry (and many others) experienced over the last eight years”.

Is a timeline that would see sports betting legalised in the USA in the coming 12 months an at all realistic one? Such a vision is very hopeful, according to David Schollenberger. Speaking to Gambling Insider on the subject of whether regulation is likely in 2017, Schollenberger is unequivocal in his response: “No. Gambling is regulated in the US both by state and federal law. Only Nevada currently has legalised sports betting and it will be a slow process to change this in other states and at the federal level.”

His take on the issue is shared by Steve Ruddock of the Online Poker Report, who tells Gambling Insider: “It seems overly ambitious. There’s been little appetite for it in the past, and gambling is never really a big focus of lawmakers in the US. It’s a subject they would rather avoid than vote on either way, regardless of what their personal opinions on the matter are.

“In short, it’s a very ambitious timeline. There has been movement on the DFS front, which may give some hope to the AGA and other groups trying to push for the introduction of legal sports betting into the US, but it seems like a state issue with gambling in the US. I’m not sure, practically speaking, how a federal bill would work. Congress has trouble passing budgets. Asking them to look into PASPA is a bit of a stretch.”

In short, given the time frames involved in federal lawmaking and the limited appetite of US legislators to tackle gambling related issues, 2017 is unlikely to be the year that proponents of online gambling regulation in the United States will be popping the champagne corks.

However, Schollenberger expressed optimism that while expecting a grand sweep of federal change in the next year or two is on the farfetched side, a legal framework for sports betting in several states in the USA will inevitably, albeit slowly, start to take shape in the coming years: “I believe over the next ten years several states will adopt legalised sports betting and at the federal level impediments to state lawmaking in this area will be removed. Three states have now legalised recreational cannabis use, so attitudes towards traditional ‘sinful activities’ are changing.”

It is driving that change in attitude towards sports betting in the USA that will be the AGA’s biggest challenge, and is undoubtedly to prove a significant factor if a regulatory framework for sports betting in the United States is to be established. As Steve Ruddock notes: “Gambling remains a very taboo subject in the US. Legislatures both in states and at the federal level are a decade behind, usually, on social issues of this nature, with the slow legalisation of marijuana being a strong case in point. Public opinion moves forward before legislation does. I think the major hurdle that the AGA and similar groups will have is mobilising public opinion behind the issue, and making it something people want to see happen.”

It is here that those backing a regulatory framework for sports betting in the USA will have a tougher job than those pushing for regulation of daily fantasy sports have encountered. According to figures released by the AGA, $90bn will be bet on American football in the coming season, of which $88bn will be wagered illegally. Broadly speaking, the players that the AGA and similar interest groups must call upon in order to foster the groundswell of public opinion required to accelerate change at a federal level are already having their needs met by illegal bookies, with that $88bn generally heading off shore.

Could DFS and the slow spread of regulation– with ten states now having passed bills legalising the activity – be a factor in changing attitudes towards sports betting? Steve Ruddock is quick to draw attention to the fact that “DFS certainly helps to normalise all types of gambling – they can say it’s not gambling all they like, but I think most people would lump it into that category”.

However, that does not mean there are no complications as far as this interpretation is concerned. As Ruddock points out, DFS “was able to mobilise its player base to push for regulation, which is something sports betting doesn’t have the luxury of. When New York was considering passing a law on DFS, DraftKings and FanDuel users were greeted by a pop-up requesting they write to the their state legislator. Sports betting doesn’t have that luxury as they are all off-shore”.

The most significant practical attempts to allow sports betting by individual states have come courtesy of New Jersey, which suffered another defeat in its bid to establish sports betting at its racetracks and casinos. The Garden State has twice now passed acts that would have repealed the prohibition on sports betting in the state, with the latest struck down in federal court back in August due to its being adjudged to have violated PASPA. ▶

It is overcoming PASPA that will be the most important hurdle, in Steve Ruddock’s estimation, as clearing that hurdle would in some way circumvent the issues offered up by the Wire Act and UIGEA: “If it’s just PASPA that gets revisited at the federal level, or if New Jersey or another state manages to win a legal case that finds PASPA unconstitutional, then the other two really don’t apply so much, as they are interstate laws. UIGEA would still apply on the banking front, but the Wire Act really wouldn’t make much of a difference.”

The “nuclear option”, according to Ruddock, is the one New Jersey now finds itself presented with, given that odds of a serious challenge to PASPA and the law being revisited are remote, that option being to effectively allow any Tom, Dick and Harry to run an unregulated sports book, which Ruddock does not imagine the state will go for, “as it opens another tremendously difficult can of worms”.

Everything circles back to PASPA, but, put bluntly, it is optimistic to expect that we will see Congress take a serious look at options including providing states with a second chance to exempt themselves from its terms, as was the case at its passage in 1992, earlier than 2022 at least.

At a presidential level, in spite of Geoff Freeman’s aforementioned confidence, will Donald Trump actually have much impact in terms of changing the landscape for sports betting regulation in the US? As with many facets of his impending regime, the answer remains an unclear one. When quizzed on the subject, Steve Ruddock offered his take on matters: “It depends. Everything is still very unclear with regarding Trump’s presidency at the moment. He has a states’ rights streak in him, which means he probably won’t want to overturn the 2011 decision on the Wire Act.

“He’s also very socially conservative – he signed onto a 1997 bill that would have made online gambling illegal. Needless to say it’s very difficult to judge which way these guys are going to go.”

Many have noted Trump’s links and long history within the gambling industry. While he no longer has any control over the shuttered casinos which bear his name, Trump has a lot of experience in the field, with many making the obvious connection that this may mean an executive branch aligned to the industry once he has assumed office on 20 January 2017.

However, complicating matters is Trump’s close political relationship with long-time Republican Party donor Sheldon Adelson, who has sought to crush the expansion of i-gaming at every opportunity afforded to him. Adelson poured $25m of his own money to a Super Political Action Committee supporting Trump’s campaign. While this was an amount smaller than anticipated, apparently due to Adelson’s reservations over Trump’s tendency to introduce his foot to his mouth and make frequent gaffes, it would be naive to imagine that Adelson does not to at least some extent have the incoming President’s ear on these matters.

Although David Schollenberger acknowledges that “there is some optimism” that Trump may move to legalise sports betting, his “close ties” with Adelson make this a more distant prospect than that optimism would suggest.

Trump’s Vice-President, Mike Pence, has also been a committed opponent to the expansion of gambling in all its forms. He signed on to the Restoration of America’s Wire Act as a governor, and voted for UIGEA in 2006, as well as the failed Restricting Indian Gaming to the Homelands of Tribes Act. Pence’s voting record makes abundantly clear his opposition to gambling, with Ruddock going on to emphasise that gambling also does not appear to be a “top level” issue for him.

Certainly, gambling being far from a top level issue for political representatives in the United States is a sure fire bulwark to any hopes of regulating sports betting. On this issue, Steve Ruddock explains: “The Republican Party is stuck between a rock and a hard place on this issue. On the one hand, they don’t like gambling, and on the other they don’t like the federal government telling the states what to do. They would rather simply not deal with it, as opposed to voting one way or the other. I don’t really know what Trump’s leanings are now, nor his cabinet appointees. If you’re an elected official in the United States, it’s an issue you would prefer to avoid.

“Having a Lindsey Graham figure, coming out and standing clearly on one side of the debate, is the exception rather than the rule.”
DISCUSS THIS ARTICLE
IN-DEPTH 16 August 2019
Roundtable: David vs Goliath – Can startups really disrupt the industry?

(AL) Alexander Levchenko – CEO, Evoplay Entertainment

Alexander Levchenko is CEO of innovative game development studio Evoplay Entertainment. He has overseen the rapid expansion of the company since it was founded in early 2017 with the vision of revolutionising the player experience.

(RL) Ruben Loeches – CMO, R Franco

Rubén Loeches is CMO at R. Franco Group, Spain’s most established multinational gaming supplier and solutions provider. With over 10 years working in the gambling, betting and online gaming industries, he is skilled in operations management and marketing strategy.

(JB) Julian Buhagiar – Co-Founder, RB Capital:

Julian Buhagiar is an investor, CEO & board director to multiple ventures in gaming, fintech & media markets. He has lead investments, M & As and exits to date in excess of $370m.

(DM) Dominic Mansour – CEO, Bragg Gaming Group:

Dominic Mansour has an extensive background of nearly 20 years in the gaming and lottery industry. He has a deep understanding of the lottery secto,r having been CEO at the UK-based Health Lottery, as well as building bingos.com from scratch, which he sold to NetPlay TV plc.

What does it take for a startup to make waves in gaming?

DM: On the one hand, it’s a bit like brand marketing; you build an identity, a reputation and a strategy. When you know what you stand for, you then do your best to get heard. That doesn’t necessarily require a TV commercial but ensuring whatever you do stands out from the crowd. Then you have to get out there and talk to people about it. 

AL: Being better than the competition is no longer enough; if you’re small, new and want to make a difference – you have to turn the industry on its head. Those looking to make waves need to come up with a new concept or a ground-breaking solution. Take Elon Musk, he didn’t found Tesla to improve the existing electric cars on the market, he founded it to create the industry’s first mass-market electric sports car. It’s the same for online gaming; if you want to make waves as a startup, you have to bring something revolutionary to the table.

JB: Unique IP is key, particularly in emerging (non-EU) markets. As does the ability to release products on time, with minimal downtime and/or turnaround time when issues inevitably occur. A good salesforce capable of rapidly striking partnerships with the right players is vital, as is not getting bogged down too early on in legal, operational and admin red tape.

How easy it for startups to bring their ideas to life? How do they attract capital?

AL: It depends on the people and ideas behind the startup. Of course – the wave of ‘unicorns’ is not what it used to be. Some time ago the hype was a lot greater in terms of investing in startups, but that’s changed now. Investors now want more detail – and even more importantly, to evaluate whether the startup has the capacity (as well as the vision) to solve the problem it set out to address. That’s not to say investors are no longer interested in startups – they certainly are – but now more than ever, it’s important for startups to understand their audience as well as dreaming big.

JB: To get to market quickly, you need a great but small, team. If slots or sportsbook, the mathematical engine and UX/UI are crucial. Having a lean, agile dev team that can rapidly turn wire framing and mathematical logic into product is essential. Paying more for the right team is sometimes necessary, especially when good resources are scarce (here’s looking at you, Malta and Gibraltar).

Building capital is a different beast altogether. You won’t be able to secure any funding until you have a working proof of concept and, even then, capital is likely to be drip fed. Be prepared to get a family and friends round early on to deliver a ‘kick-ass’ demo, then start looking at early-stage VCs that specialise in growth-stage assets.

How do you react when you see startups coming in with their plan for disruption?

RL: We welcome the innovation and fresh thinking startups bring. This is particularly the case in Latin America, with a market still in its infancy. One area we’d especially like to see startups making waves is in the slot development sector. Latin America is a young market that needs local innovation suited to its unique conditions – especially in regard to mobile gaming.

Operators eyeing the market have Europe‐focused core products, which creates a struggle to work to the requirements of players and regulators. To succeed there, it has become more important than ever to work with those with a knowhow of the local area to adapt products and games to besuitable from the off; we welcome the chance for local talent to develop and grow.

Do you think it’s easier for established companies to innovate and establish new ideas? 

AL: From a financial perspective, yes. It is without a doubt easier for incumbent companies to establish a pipeline of innovation via their R & D departments, as well as having the tools to hand for data gathering and analysis.

But it stops there. Startups hold court in every other way. Not only are they flexible, they can easily switch from one idea to another, change strategy instantly as the market demands and easily move team members around. Established companies know this – and this is why we’re seeing an emerging trend for established companies to acquire small, innovative online gaming start-ups. They have the right resources and unique ideas, as well as the ability to bring a fresh approach to businesses’ thinking.

RL: For me, it’s always going to be established companies. Only with the resources, industry experience and know‐how can a company apply technology and services that truly make a difference. Of course there are exceptions. But when it comes to providing a platform that can be approved by regulators across multiple markets – as well as suiting an operators’ multiple jurisdictions – it is simply impossible for a couple of young bright minds with a few million behind them to get this done.

DM: I actually think it’s harder for established companies. It’s key to differentiate between having a good idea and executing one. That’s where the big corporates struggle most. They’re full of amazing people with all sorts of great ideas but getting them through systems and processes is nearly impossible.

Is it essential to patent-protect innovative products?

AL: It’s a very interesting subject. If we take IT for example – patents can actually become a block to the evolutionary process within the industry. Of course, getting a patent future proofs yourself from the competition copying your concept but, having said that, if you’re looking to protect yourself from someone more creative, smarter and agile, you’ve probably lost the battle already!

In our industry everything is moving faster and research takes less time than the development itself. No matter how good you are at copy pasting, you can’t copy Google or Netflix. The most important thing is not the tech itself but rather its ‘use-case’ – or in other words, does it solve what it’s meant to solve? Competition is healthy and the key to innovation. If you spend your whole time looking behind you, you’ll never be able move forwards.

JB: Tricky question, and one that depends on what and where you launch this IP. It can be difficult to patent mathematical engines and logic, mostly because they’re re-treading prior art. Branding, artwork and UX is more important and can easily be copied, but the territories you launch will determine how protectable your IP will be once patented. US/EU/Japan is easy but expensive to protect in. But China/South East Asia is a nightmare to cover adequately. Specialised patent lawyers with experience in software, and ideally gaming, can help you better.

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