Place Your Bets

On May 14th, the U.S. Supreme Court struck down a federal ban on sports betting.  This six-year battle was led by the state of New Jersey and its former governor Chris Christie.  States are now allowed to legalize gambling on professional and collegiate sports.  The American Gaming Association estimates that at least $150 billion is illegally bet on sports every year in the United States.  By some accounts, this figure could be significantly higher as accurate statistics are impossible to verify – $400 billion is a number often tossed around by analysts.

In Las Vegas, where sports betting has been legal for years, the amount wagered on sports (often referred to as the “handle”) amounts to about $5 billion per year and casinos generally book about 4-5% of this total as revenue.  Assuming the vast majority of illegal sports betting eventually goes legal, the opportunity for industry players is huge.

It will take some time to get all the details ironed out for legal sports betting to begin on a state-by-state basis, but in our view there are some obvious winners and losers from this ruling:

Winners  

Progressive States – New Jersey, Delaware, Pennsylvania, West Virginia and Mississippi are expected to be the first states that offer sports betting with up to 20 more following in the coming months.  Most states are looking to tax winnings 5–15% although Pennsylvania will take more than 1/3 of winnings based on a 2017 law.  These “sin taxes” will be newfound state revenues.  It will be interesting to see if Pennsylvania’s high tax rate dissuades gamblers from using legal channels to make their bets.

European Bookmakers – William Hill, Paddy Power, and GVC are three of the largest European bookmakers.  Gambling on sports in the UK dates back to the 1960s and there has been significant consolidation among industry players as regulations squeezed out smaller operators.  William Hill already operates numerous sports books on behalf of Vegas casinos while Paddy Power and GVC have dominated online betting portals.  While all three are beefing up their U.S. operations in preparation for a flood of new opportunities, it is notable that Paddy Power recently agreed to acquire the majority of the daily fantasy operator FanDuel.  The combined business will control more than 40% of daily fantasy sports betting with a 7 million member customer base.  These experienced bookmakers will target specific states on their own while entering others through partnerships with local operators.

Professional Sports Leagues – The NBA, MLB and other professional sports leagues see the legalization of sports betting as a new revenue opportunity.  “Integrity fees” will be taxes that the sports leagues collect based off of a percentage of the handle.  Many experts agree that 1% will be the going rate for most sports.  A $100 bet on the Broncos to beat the Patriots would theoretically yield a $1 in pure profits for the NFL.  Legalized gambling could also increase viewership across leagues.

Multimedia Companies – There is an argument that sports viewership will increase as money is bet on particular events or performances (i.e. Von Milller sacks Tom Brady 4 times in one game).  Multimedia companies that offer sports network feeds or websites should stand to benefit as a larger audience of the gambling public tracks games.  Should eyeball count increase, so too is the likelihood that ad rates rise across platforms as well.  Disney, Viacom, and Comcast are examples.

Casual Gamblers – With the exception of an occasional office run Super Bowl or March Madness pools, casual sports gamblers have been forced to find a friend to take the other side of any bet or locate a bookie.  Liquidity is scarce and the selection of options is extremely limited.  With the introduction of legalized sports betting, casual gamblers will be able to wager on pretty much any outcome or performance known as a “prop bet” (such as the number of times that Tom Brady fumbles a snap during a game).

Social Media Companies – Half the fun of winning a bet is telling all of your buddies that you outsmarted them.  In today’s age, there is no better method than to post notice of your victory on Facebook or tweet out self-congratulations on Twitter.  The social media platforms will remain excellent sources for real-time information including updated lines, injuries or suspensions (such as Tom Brady’s Deflategate decision).  Sports betting related use of new media should skyrocket as legalized gambling becomes active across states.

Sports Data Providers – As sports betting expands through multiple channels, bookmakers will rely on quality sports statistical data to formulate lines, bets and track games.  Increased demand for these services from the casinos/bookmakers as well as the gambling public will drive incremental revenue for these providers.  Elias Sports Bureau and STATS LLC (both private) are two of the largest sports data providers in the United States.

Team Owners – A knock-on effect from increased revenues flowing to the professional sports leagues from integrity fees is that franchise valuations should continue to increase as incremental profits are distributed to the clubs and viewership increases.

Losers

Land-Based Casinos – Today 30 states allow some form of legalized gambling.  While many commercial casinos will likely open sports books to accommodate betting, there is potential for consumers to spend less time/money at casinos if they can place their bets remotely.  In the world of gambling profitability, slot machines and video poker are the best performers and with less in-person traffic, some casinos will likely be impacted.

Las Vegas – Although Las Vegas has transformed from a gambling hub into an entertainment/leisure center, the incremental customer that spends time in Sin City to bet on sports will have multiple different avenues to pursue.  Las Vegas sports wagering totals about $5 billion per year with revenues of $200-$250 million which represents only a small sliver of the Strip’s economy.

Offshore Bet Makers – Numerous non-American jurisdictions (often found in the Caribbean) offer online sports betting for consumers willing to send money to offshore accounts.  Despite somewhat questionable business practices, there has been strong demand for these services from gamblers without access to legal sports betting in Vegas or a bookie.  These offshore providers will struggle as states legalize sports betting although some consumers may choose to dodge state taxes by remaining outside the grasp of the U.S. government.

Bookies – One of the biggest losers will be illegal bookies who have handled under-the-table gambling for decades.  With legalized sports betting there will no reason to meet your bookie in a dark alley to place your bets.  One wildcard is the impact of taxation – in some cases, betters may want to dodge punitive state taxes by remaining underground.

Professional Gamblers – Prior to legalization, the markets for setting lines and spreads were often illiquid and imperfect, creating opportunities for the “professional gamblers” to pray on less informed bettors.  With the legalization of sports betting, liquidity will significantly increase and lines will normalize creating a free market, thus eliminating some of the advantages of professional sports gamblers.

Rural/Local Casinos with Little Focus on Sports Betting – Assuming online sports betting becomes mainstream in the coming years, consumers may make fewer visits to rural casinos as sports betting consumes wallet share from traditional casino gaming.

Horse/Dog Tracks – The one public horse track operator, Churchill Downs, made a decisive move to enter the New Jersey sports betting market two days after the Supreme Court’s decision.  The partnership with the Golden Nugget Atlantic City allows them to start up their online betting in 1Q19.  Most other race tracks are much smaller and do not have the ability to partner with large industry players, clouding their futures as gamblers now have multiple new opportunities for betting on a variety of sports beyond horse and dog racing.

The NCAA – At this point it is unclear if the NCAA will be able to harvest incremental revenues from legalized sports betting.  An integrity fee may be difficult to implement given the large number of teams and sports.  With collegiate athletes unpaid, there could also be increased corruption opportunities (aka point shaving, etc.).

The NFL – Roger Goodell and the NFL were key opponents to legalized sports betting and although they have come around to the new reality, it remains to be seen how they will approach industry partnerships.