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IN-DEPTH 1 October 2018
The integrity fee debate
Now that the US Supreme Court has done away with the Professional and Amateur Sports Protection Act (PASPA), Jake Patel looks into whether the sports leagues should be taking a slice of the pie.
By Jake Patel

With the introduction of legalised sports betting across the US comes the issue of regulation and ensuring everything is above board and legal.

Enter the sports leagues.

In the build up to the Supreme Court’s ruling and striking down of the 1992 PASPA, the four major North American sports leagues and the National Collegiate Athletic Association actively fought against New Jersey’s efforts to legalise sports betting before it reached the Supreme Court.

Now the leagues have changed their tune… as they could stand to benefit from legal wagering on their sports. The leagues have recently pushed for tax revenue from all legalised sports betting activities on the basis that monitoring the integrity of the sports and ensuring there is no foul play will put a financial burden on them. This is being referred to as an integrity fee.

Jake Williams, Head of Legal for sports data services supplier Sportradar, told Gambling Insider: “They are going to need to watch what’s happening with their sporting events, whether it’s collecting information or monitoring that information so that they know exactly what is happening in a regulated market. Alternatively, they could be doing that on a global basis as well, considering that the betting markets are now truly global.

“They are going to have internal costs, including staffing up, having betting experts join the teams within league offices to understand what’s happening, and if they need to respond at all with regards to whether it’s suspicious betting activity. There is also the education part. They have to talk to their players and coaches, their team owners and all the staff around the leagues and tell them how this is a new area for them and educate them on what might happen.”

VIEW FROM THE LEGISLATOR

The first state to include the integrity fee in its sports betting legislation was Indiana. In January, a bill was put forward allocating a 1% integrity fee to sports leagues depending on the wagering handle. The bill would also impose a 9.25% tax rate on sports betting revenue. Another bill was introduced, which didn’t include integrity fees. Although neither bill was passed in the 2018 legislative session, a member of the Indiana House that supported the bill, Representative Alan Morrison, said there was some input in the initial bill from the NBA and MLB. Morrison told Gambling Insider: “We need to understand these major sports leagues will see an increase in wagering on their sports. If they think they should be compensated for it, that is up to them. I don’t agree or disagree, but I do see where they are coming from.

“We are pretty unique here in Indiana. We were the first state to be approached by any major sports leagues to be part of legislation at the state level. We’ve been able to open up an important dialogue. They requested to be included and it was not a bad way to start the conversation.”

But not all states are interested in including integrity fees in their sports betting legislation. New Jersey, the first state to implement legalised sports betting, has not included an integrity fee in its legislation, with one of the state’s top lawmakers urging other states to reject integrity fee payments to sports leagues.

Steve Sweeney, the Democratic State Senate President, even went as far as describing the integrity fee as “extortion” in a letter addressed to governors and legislative leaders back in May.

“Essentially, the leagues are askingto be paid to allow games to be played fairly,” Sweeney wrote.

“Ironically, they are calling this extortion attempt an `integrity fee,’ even while fully aware that providing participants a stake in the volume of betting would amount to what could more accurately be called an ‘anti-integrity fee.’

“Their demand begs the question of what they would now start doing to preserve the integrity of their games that they have not been doing for years.”

The American Gaming Association (AGA) has also voiced its concerns with the introduction of the integrity fee.

Sara Slane, Senior Vice President of Public Affairs at the AGA told Gambling Insider these fees will “essentially be taking money away from the tax payers and state. There will be less state revenue as the deductions are made before tax and revenue is paid to the state. The leagues appear to be more concerned with paying themselves.”

At the rate it’s going, it does not look like the debate around integrity fees will last much longer. The argument put forward by the leagues hasn’t had much traction at all. Slane went on to say that “it’s an uphill battle for the leagues that are pursuing integrity fees,” and that she’d be “surprised if any states entertain the notion of including integrity fees in the future.”

Adam Silver, the commissioner of the NBA, commented on integrity fees at a conference in July, saying: “Frankly, it’s not a place we’ve made a lot of progress. It’s one of the issues we’re talking to states about. We’re also very focused on how the data will be used and how we can protect the integrity of the league.

“My view is we should be compensated for our intellectual property, but we can do that directly, again, with commercial relationships with gaming establishments.”

Slane went on to say integrity fees will have a negative impact on operators as they “need that flexibility to compete with each other and integrity fees will make that harder. It sets a terrible precedent.”

There is also the view that states could take lessons from Nevada, which has had legal sports betting for several decades.

Slane said: “Nevada has proven that it has a strong sports betting model and has taught us lots of good lessons that other states could learn a lot from.”

This thought was echoed by Representative Morrison, who said: “We don’t have to reinvent the wheel completely. We can take some parts of what Nevada does, or even what is done internationally, to put together something that works for Indiana.”

Williams said: “Given it’s on a state-by-state basis, I think having a mish-mash of different regulations and even legislations would cause its own problems, so I think preferably, you would have a uniform approach and just if it’s a good idea or not, and if so, at what level is it a good idea?

“I think a 1% tax on turnover or handle is probably a bad idea, because you’re going to have to have federal and state tax taken out of that too and operators won’t be able to operate it effectively. Having that implemented on a uniform basis across all states would make life easier for everyone, including the leagues, operators and the state regulatory and legislative bodies.

“This industry has done a pretty good job monitoring suspicious betting, the bookmakers don’t want match fixing going on, the leagues don’t want match fixing going on - no one really does. It’s an alignment of interest for all of the parties involved to make sure the games are protected, match fixing is not happening and that there is prevention in place.”

HOW UNIQUE IS THIS ISSUE?

There are lessons that the sporting leagues in North America can learn from other countries with legalised sports betting.

In the UK, sportsbooks don’t pay any integrity fees to the leagues, but instead pay data rights fees. The English Premier League has been receiving huge revenue boosts from sportsbooks for data rights agreements since 1992. These agreements essentially provide bookies with the sports data necessary to calculate and formulate odds. This also allows sportsbooks to enter into sponsorship agreements with individual football clubs.

In the past, the US leagues have sold access to their data to daily fantasy sports operators DraftKings and FanDuel, so it is possible that they may try to assert their ownership of the data to sell it on to sportsbooks. First, though, the leagues must be granted exclusive rights to the data by the courts.

Alternatively, in Australia, integrity fees are very much a thing.

The sports leagues enter into private agreements with sports betting operators, which are referred to as an integrity agreement or a product fee. These agreements require betting operators to pay fees of up to 4% of their betting turnover, and to meet integrity controls and regulations imposed by the sports body they are in agreement with. In some cases,the sportsbooks have to comply with specific legal guidelines. The main takeaway from Australia is that special consideration has to be given to how integrity measures are implemented and how integrity fees are calculated.

Representative Morrison said: “I don’t think the focus should be on an integrity fee, but rather an integrity component in the legislation I author again next session. There needs to be some kind of integrity component to sports wagering and there are multiple ways of doing that. It’s very likely that many states will not have an integrity fee.”

Implementation of integrity fees in the US, then, seems rather unlikely at this point. But that won’t stop the leagues from trying to get their cut from the legalisation of sports betting.
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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