Last year saw dozens of states considering sports betting policy for the very first time; a daunting task, but an exceptional opportunity to regulate and tax a massive industry. State policy makers have a lot of factors to consider, and unsurprisingly, maximum revenue generation is the top objective for many cash-strapped states. Some states have pursued the questionable approach of making sports betting a government-run product, with the idea that the state lottery can create a monopoly on sports betting and keep all the profit.
Besides being anti-capitalist, this approach is rife with unintended consequences and results in a far less enticing legal sports betting marketplace for consumers. If states want to take market share from the thriving offshore sports betting market, they need to allow for the creation of a legal, privately-operated sports betting market that provides convenience, choice and innovation. These are things a state-run sportsbook simply can’t offer.
OFFSHORE OPERATORS REIGN SUPREME
In the 25+ years which the federal law known as the Professional and Amateur Sports Protection Act (PASPA) made sports betting illegal in most of the US, a massive black market sprung up to fill the demands of US sports betting customers. Real numbers are hard to pin down, but it’s been estimated the black market accounted for 97% of all sports betting in the US, or hundreds of billions of dollars each year in bets.
The overwhelming majority of this action has been placed with offshore sportsbooks, easily accessible with an internet connection and a credit card. There are literally hundreds of offshore books, and they aren’t going away any time soon. The reversal of PASPA has been a significant marketing opportunity for them to further solidify their positions.
State sports betting laws can authorise the creation of a new legal market for sports betting, but they can do very little to control the existing offshore market or keep their citizens from betting with them. Because offshore books aren’t taxed, they have higher profit margins and can offer better odds, and because they aren’t regulated, they also offer incentives like anonymity - most offshore books would not even know what a 1099 form is.
The most important factor in whether legal sportsbooks are successful is how well the legal market can draw customers from the offshore books. Most customers will prefer to spend their money with a legal sportsbook if given the choice, but mere legality won’t be enough if the product is lacking or there isn’t a wide variety of options.
Some people might just inherently feel a little bit uneasy about the prospect of placing bets with the same state government that collects their taxes, and will seek a private alternative as a result.
SOMETHING FOR EVERYONE
Sports betting is a little bit like beer. Just as there are hundreds of craft brews to choose from, there are also hundreds of offshore sportsbooks, because customers crave variety.
Some people are fine with plain old Budweiser, but there are many others who aren’t going to settle for a generic offering. Different sportsbooks offer unique incentives, unique specialties and different types of betting options to keep customers engaged. Some sportsbooks might specialise in American football, soccer or more niche sports or events. In short, no single sportsbook can do it all; even if it could, the customer would still comparison shop for the best deal.
If a state thinks it can replace this diverse array of sports betting options with a single one-size-fits-all lottery-run sportsbook, they are mistaken. If Budweiser is the only legal option, most customers will continue to look to the grey/black market to find their drink of choice.
BETTORS DEMAND INNOVATION
The days of going to a cage at a casino and placing a bet on the winner of a game are already coming to an end. Bettors may still want to bet on the final outcome of a game, but they also want to bet on more immediate events, such as who will catch the next touchdown pass or hit the next home run.
In the UK, a mature market where sports betting is common and well-regulated, live betting accounts for well over half of all bets placed. If a state lottery wants to capture customers, it will need to continually invest in state-of-the-art technology to create a best-in-class product that can keep up with dedicated private sportsbooks.
Without the knowledge and experience to run a complex sports betting operation, it may be unreasonable to expect a state lottery to be able to compete.
SPORTS BETTING IS VERY DIFFERENT FROM THE LOTTERY
A total of 44 states and the District of Columbia have a lottery that is run by their state government. But games of pure chance like the lottery are far different from sports betting. With the lottery, the outcome is entirely determined by a random number generator with odds set in advance – it’s a guaranteed source of profit.
In sports betting, however, the outcome is not predetermined – athletes are not random number generators and the unpredictability which makes sports so exciting for viewers is also a potential thorn in the side of a bookmaker trying to turn a profit. Setting lines and adjusting risk is extremely complicated and profits vary tremendously over time. These facts alone make sports betting an unreliable source of consistent income if the state is running operations as opposed to taxing those who operate in their state.
It is entirely possible to lose money operating a sportsbook if the risk management portion of the business is not handled properly. The more stable policy choice is to let private companies handle the risk and pay the state a reasonable percentage of their gross income.
LETTING THE FREE MARKET WORK FOR THE STATE
The state should regulate, not participate. A state simply having a new opportunity to profit doesn’t mean it’s a good idea to insert itself into private industry. Think of how poor the response would be if the state banned Uber and Lyft to create its own government-run rideshare service. The same holds true for the tech-driven world of sports betting; customers won’t stick around if a state-lottery-run sports betting product fails to keep up with the rest of the world, especially with offshore sportsbooks only a few phone taps away.
In Europe, sports betting is commonplace and consistently profitable, both for the hundreds of sportsbook operators and the governments that tax them. Nevada is known as the capital of sports betting in the US and New Jersey is leading the way among states to have embraced online sports betting.
The one thing these places have in common is an open, well-regulated, safe and competitive market that allows companies to obtain a license and turn a profit subject to a reasonable state tax. In only a few months, New Jersey is already firing on all cylinders, with over a dozen physical sportsbooks in casinos and at least eight online operators, with many more on the way.
Revenue has been impressive in New Jersey, but its neighbours’ sports betting efforts have stagnated. The states of Rhode Island and Delaware have both given their lottery the sole authority to offer sports betting. In Rhode Island, a long delay meant the loss of weekly revenue for some time, especially during the NFL season. This could have been avoided had it opened its doors to private enterprise rather than trying to handle it all alone.
The state lottery approach to sports betting simply doesn’t work. A well-regulated free market will both increase the amount of betting and bringa greater percentage of bets away from the offshore market, thus allowing the state a larger base of activity to tax. States will do much better taking a smaller piece of a substantially larger pie than they will by trying to monopolise sports betting.
As state lawmakers across the country wrestle with various sports betting policies, they should steer clear of the risk of trying to do it all themselves. They could potentially end up with nothing.
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