Tom Doyle

Sports Wagering Challenges and Opportunities

The excitement of wagering on sports is now spreading across the country after the Supreme Court decision to remove Nevada’s monopoly on legalized sports betting. While many states view this as a great opportunity for more tax revenues, the opportunity will come with many challenges and adventures, including profitability of sports wagering, state licensing and taxation, rules for and types of wagering permitted and combating fraud and illegal activity. To gain insight on the financial impact that may soon be experienced in other states, it is appropriate to review Nevada’s results. Casinos have spent hundreds of millions of dollars on physical race and sportsbook facilities. Elaborate sportsbooks are often considered a key component of a casino operation to bring in high-end gamblers. But with the narrow operating margins of sportsbooks, these are not highly profitable, if profitable at all. Figure 1 depicts some interesting statistics for Nevada based on averages for the last three calendar years.

Nevada statistics also provide an indicator on which sports bettors will be placing their wagers. Here is a quick recap of what is currently popular in Nevada based on data for the last three years:

  • 39% wagered on football
  • 30% on basketball
  • 23% on baseball
  • Under 8% on all other sports combined

One of the common misconceptions is the percent of wagers that casinos retain: the hold percent. The wagering odds are displayed in the form of “money lines,” and the odds would normally be reflected as “-110” for each team. A straight wager on a team using the point spread would reward a bettor with $100 in winnings for every $110 bet. That $10 difference is the sportsbook’s advantage. Such wagers statistically hold 4.55 percent. In Nevada, the sportsbook hold percent ranges from under 5 percent to 5.5 percent when parlays and exotic wagers with higher hold percentages are mixed in. This reality of low-hold percentages impacts the ability of sportsbooks to be profitable, especially when existing in high-tax jurisdictions.

As states legalize sports betting and either states or operators set odds, the potential exists that this payback to players could be reduced to increase profits and/or taxes. A situation could even develop where bettors could go to border states to seek better odds or return to illegal bookies to get Nevada-style odds. The potential of reducing paybacks to bettors also could contribute to illegal bookmakers keeping their operations alive by offering higher paybacks.

Figure 1: Nevada Sportsbook Statistics

Naturally, the evolution of sports wagering will be a combination of wagering at sportsbooks and mobile/online wagering. For an operator, focus may shift to the mobile methodology due to its lower cost of operations. Casinos and racetracks will build sportsbook facilities to attract customers that will gamble on slots and table games, as well as spend money on food, beverage and retail outlets. In fact, standalone physical sportsbooks would likely be unprofitable, especially in high-tax jurisdictions. Though such locations could be operated at low cost as a gateway attraction to online wagering. Adding a third-party sportsbook to an existing sports bar or similar operation will also be a viable option.

During the expansion of casinos across the U.S., the taxation rates have varied widely. The same can be expected for taxation of sports wagering. How should states tax revenues? States have the option of either taxing based on a percentage of total wagers or a percent of net winnings. An interesting example of a unique tax policy is the Integrity Fee committed for sports organizations that was established in Delaware at a rate of 1 percent of total wagers. If the sportsbooks hold 5 percent then that 1 percent is a whopping 20 percent tax/fee on expected net revenue (wagers less payouts) before the state takes its share for taxes. With early taxation rates on net revenue by Rhode Island at 51 percent and Pennsylvania at 36 percent, it is easy to conclude that the only entity making a profit will be the states. New Jersey has taken an interesting approach by charging different rates for book winnings for on-site wagers (8.5 percent), versus online/mobile wagers (13 percent). Of course, taxing total wagers is safer from the states’ perspective as it pushes all the risk to the private sector, which only profits from net revenue. If a state were to expect to generate $20 million in tax revenue from a 25 percent tax on net revenues, then sports wagering in that state would have to generate about $80 million in net revenue from about $1.6 billion in wagers. That is a very challenging goal since that equals more than one-third of what Nevada generates now as the premier sports wagering giant and, up until now, the only major sports betting state in the United States.

Of course, taxing total wagers is safer from the states’ perspective as it pushes all the risk to the private sector, which only profits from net revenue. If a state were to expect to generate $20 million in tax revenue from a 25 percent tax on net revenues, then sports wagering in that state would have to generate about $80 million in net revenue from about $1.6 billion in wagers. That is a very challenging goal since that equals more than one-third of what Nevada generates now as the premier sports wagering giant and, up until now, the only major sports betting state in the United States.

Sports wagering will rapidly grow with state approvals coming via legislatures or votes of the population. There are rumblings that Congress is looking to establish a uniform set of rules to govern sports wagering and protect the integrity of sports. Such legislation could add more complexity and federal oversight that will make the entire process more confusing.

In addition to integrity, fees and taxation, states will face other tough decisions. Who will they license? States do have the option of a single operator similar to how lotteries are setup. Alternatively, the licensing could be an open season free-for-all in which numerous large corporate and small entity sportsbook operators set up shop. The latter is much tougher to regulate and control, though it is more of a free enterprise type structure. Without question, another major player in this arena will be the Tribal casinos, which can immediately start up sports wagering as soon as a state adopts the laws.

Rules for what is allowed for wagering can also be complex as in-game wagering has become popular in Nevada. In-game wagering is the ability to bet on games’ final outcome while the game is still in progress. The odds change frequently as teams play and score. Some of the biggest “errors” and scams in sports betting history have occurred with what is called “past-posting,” the act of wagering on an event after an outcome is known or is certain. Then there were errors made by operators where parlay cards were set up incorrectly, including an incident where the favorite and underdog teams for NCAA basketball games were accidentally reversed. The question of whether states place a maximum on straight bets or other bets may also come into play.

In addition to potential for fraud and scams, there are other regulatory concerns and illegal activity that will be faced by every state. Interstate wagering remains illegal and in violation of federal law. Professional bettors will take advantage of the fact that the point spreads on games will often be set locally, shifted to account for local team support. In other words, for a Patriots-Falcons game, the New England Patriots could be a seven-point favorite in Boston sportsbooks, while they could be only a five-point favorite in Atlanta books. Professional bettors may attempt to middle the point spreads (e.g. bet on Atlanta in Boston and Patriots in Atlanta, hoping Patriots win by six points) with interstate wagers. This type of activity is illegal, but no doubt a factor to be considered with the spread of legal sports wagering. It is also important to understand that oddsmakers do not set point spreads based on what they think the outcome of the game will be, but rather they set point spreads based on their opinion of what will balance out the betting on both teams.

Along with the legalization of sports wagering, states will no doubt increase emphasis on both responsible gaming and anti-money laundering. Ensuring that bettors do not take unnecessary risks by excessively wagering on games will be of paramount importance to legislators and groups that justifiably want to protect gamblers from their addictions. Furthermore, with potential for large sums of money being wagered legally, the possibility of increased money laundering clearly exists. The Bank Secrecy Act was established in 1970 to report on both large cash activity over $10,000 and on any transactions that are suspicious. Of course, the scene of a player pulling in excess of $10,000 in currency out of a paper bag might be considered by most people to be suspicious in itself. One good example of potential suspicious activity would involve a money launderer using sports betting to launder funds at a fixed cost of about 5 percent. This would be accomplished by placing equal wagers on opposing teams in a sporting event resulting in always winning one of the two wagers, likely at different betting sites. Keep in mind that this activity and reporting data now brings the Internal Revenue Service (IRS) and Financial Crimes Enforcement Network (FinCEN) into play as regulators of sportsbook activity.

For state regulators, the challenges will be ever-evolving. If not already under consideration as states develop their rules, wagering on fantasy football and other fantasy sports will become a hot topic. Some operators may even pursue virtual sports wagering as another option. While the new tax revenues will create initial excitement for adding to state resources, the responsibility for regulating a very unique form of gambling and getting their auditors, investigators and regulators up to speed on all the nuances of sports wagering will not be an easy task and could involve some painful learning curves.

Sports wagering is a very different type of betting, and with the outcomes of wagers being based on individual and team performances, there is a human factor that is always in the mix. This will no doubt impact illegal sports wagering significantly in the states where legal sports betting is adopted. It will be interesting to see how that segment of individuals either react or find a way to take advantage of legal wagering.

In conclusion, there should be two key takeaways from this article. First, operators may find that generating a profit with high tax rates, low margins and competition will be extremely difficult and by no means automatic. Second, states will find that regulating the sports wagering industry will be far more complex than expected. A new era is upon us, and as the states adopt their sports wagering policies, the path to make this a success and to keep the industry clean with integrity will be filled with opportunities and challenges.

Tom Doyle (Retired CPA) is currently Chief Financial Executive for Thunderbird Lodge Preservation Society. Previously Tom was Vice-President of Product Management and Systems Compliance for Scientific Games. In this capacity he directed the various aspects of Bally System software products and regulatory compliance efforts from August 2002 to November 2017. Prior to Bally, Tom spent about 3 1/2 years as the General Manager of the Spa Resort Casino in Palm Springs, California working for the Agua Caliente Tribe. Tom has been in the casino industry since 1977 and has enjoyed positions with Lodging & Gaming Systems as a Director of Consulting and Financial Officer (4 years), the Peppermill Hotel Casino group as a VP (6 years), and the Nevada Gaming Control Board. At the Nevada Gaming Control Board he was Audit Supervisor and one of the key authors of the original NGCB Minimum. Contact Tom.