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The U.S. Sports Betting Industry At Five: What Does The Future Hold?

May 15, 2023
Almost five years later to the day, the overturning of the Professional and Amateur Sports Protection Act (PASPA) by the U.S. Supreme Court has proven to be a seminal moment in the global gaming industry. In this forensic explainer, VIXIO GamblingCompliance examines the key themes of the U.S. sports-betting industry, their impact to date, and how they are likely to impact the industry’s growth going forward.

Body

The next half-decade

Almost five years later to the day, the overturning of the Professional and Amateur Sports Protection Act (PASPA) by the U.S. Supreme Court has proven to be a seminal moment in the global gaming industry. In this forensic explainer, VIXIO GamblingCompliance examines the key themes of the U.S. sports betting industry, their impact to date, and how they are likely to impact the industry’s growth going forward.

Introduction

The Supreme Court's decision to effectively permit states to make their own choices regarding the legalization of sports betting opened the door for the largest and swiftest nationwide expansion of gaming in U.S. history, with 37 states plus the District of Columbia now either offering sports wagering or having passed legislation to eventually do so.

As a result, the U.S. gaming industry has seen new power players emerge seemingly overnight.

Daily fantasy operators turned sportsbook giants FanDuel and DraftKings have led the way in most states, doubling down on their initial brand recognition and fantasy sports customer databases through billions of dollars in marketing spend over a five-year stretch that is only now beginning to slow. Casino operators with decades of experience have continued to modernize and embrace mobile technology like never before to compete. European operators and start-ups have tried to stake their claim in the fertile ground, with mixed results.

On top of that, the sports-betting industry’s footprint has expanded to include new stakeholders such as state lotteries, tribal gaming operators, and perhaps most notably, professional sports leagues, once the staunchest opponent to expanded sports betting but now one of the industry’s greatest champions.

Throughout these five years, some issues have come and gone as matters of significant importance, but some themes have remained key throughout and are likely to continue to be areas of focus over the next five years.

Leagues Step Up To The Plate

How did professional sports leagues go from one of the gaming industry's greatest antagonists to one of its most important allies?

National sports leagues

To understand why the role of the leagues is so significant, one has to understand how opposed to sports-betting expansion the likes of the NFL and Major League Baseball were for the decades that preceded PASPA’s demise. For one, if it wasn’t for league lobbying in the early 1990s, there never would have been a PASPA in the first place. And as New Jersey legislators challenged the law beginning in 2009, leagues remained steadfast in their opposition.

In a 2012 deposition, NFL commissioner Roger Goodell called gambling the number one threat to the integrity of professional football in the U.S. About ten years later, however, he stepped onto a stage on the Las Vegas Strip as the league hosted the annual NFL Draft in Las Vegas just a few blocks away from Allegiant Stadium, the new home of the Las Vegas Raiders. In 2021, the NFL announced official sports-betting partnerships with FanDuel, DraftKings and Caesars Entertainment.

Each U.S. major league has a similar story of prior opposition, but all have ended up in the same place, which is as a partner in the sports-betting industry rather than an adversary. Each major league, including Major League Baseball, the National Basketball Association and the National Hockey League, has multiple official sportsbook partners, in addition to even more partnerships formed locally by their respective member clubs.

The leagues’ support has been invaluable towards the efforts to legalize sports betting as rapidly and as broadly as it has. For all of the political strength that gaming interests such as casinos have in some states, professional sports teams are almost civic institutions in many markets with a certain clout that is rivalled by very few industries.

Major sports-betting operators realized that from an early stage, and a lobbying partnership umbrella that includes the NBA, MLB, FanDuel, DraftKings and BetMGM, among others, has been among the strongest pro-sports betting lobbying forces in the country and become the driving force to extract sports betting legislation on favorable terms for the leagues, including requirements for operators to use official league data to settle certain wagers in several states, as well as mechanisms for the leagues to petition for the removal of any bets they see as integrity threats.

On top of that, in several key states such as Arizona and Ohio, professional sports teams have become the direct holder of a sports-betting license that allows them to partner with a designated sports-betting operator and directly benefit, in addition to indirect benefits that leagues have touted such as increased fan engagement with betting options available.

The challenge for both operators and leagues in maintaining these partnerships going forward will be navigating the responsible gaming and sport integrity questions that inevitably accompany such a cozy relationship. Both sides have avoided any type of major scandal other than a few player suspensions for gambling on their own sport, but if a juicier incident emerges, critics already uncomfortable with the idea of leagues working in tandem with gambling interests will be armed and ready for what would be a high-profile fight that could potentially involve politicians at the federal level.

IN BRIEF

  • Leagues went from PASPA's biggest backer to key ally in sports-betting legislative battles
  • League and team marketing partnerships are significant tool for operators
  • Relationships could be flashpoint for criticism if major scandal emerges

The Battle For Market Share

How did U.S. sports betting's "big three" carve out a significant majority of market share?

U.S. Online Sports Betting Market Shares - Sep. 22 through May 23

In the five years since PASPA, few things have remained constant, but one of the things that has held largely firm is the market-share leadership of Flutter-owned FanDuel, with DraftKings and BetMGM holding strong podium positions in most key states.

In 2018 and 2019, as the expansion of sports betting began in the U.S., one of the key focuses for sports-betting operators was securing market access. As the old adage goes, you can’t win if you don’t play, and for online operators, securing their place in states that would ultimately tie mobile licenses to existing land-based entities like casinos and racetracks was crucial.

Although already having market access would conceivably be an advantage for established casino names, FanDuel proved to be a big early winner in this derby, quickly negotiating an agreement with Boyd Gaming to score immediate access when the lights turned on in several key states, as well as other single-state agreements such as a partnership with the Meadowlands Racetrack in New Jersey.

Other companies did not fare so well, settling for partnerships that, in hindsight, either gave away a significant chunk of revenue or equity while also not giving operators a particularly strong portfolio of states where they would have access.

Over the years, the frenzy for market access has died down somewhat as many states that followed the initial wave have passed legislation that allows for more licensing opportunities. The likes of Maryland, Massachusetts and others have adopted a more open licensing process or additional opportunities for existing land-based stakeholders rather than more finite licensing opportunities. In addition, in some states, operators with market access have since vacated the space, such as Churchill Downs abandoning its online sports betting efforts, or theScore being acquired by Penn Entertainment and consolidating its U.S. operations into the Barstool Sportsbook brand.

The second tool that the big three sportsbooks have utilized to their advantage is pure financial firepower. FanDuel and DraftKings already had a deep customer database in many states from about half a decade as a daily fantasy sports operator, but both companies have since spent more than $2bn each on marketing spend, including television advertising and enticing promotional offers.

BetMGM has also spent heavily to keep up, but after several years of free spending and absorbing significant losses, the pressure has ramped up from stockholders of all three companies (including FanDuel parent Flutter and BetMGM parents MGM Resorts International and Entain) to start to turn a profit sooner rather than later.

But the one tool from a product perspective where FanDuel clearly carved a significant edge over its competitors is its popular same game parlay offering. These higher-margin bets have been a popular choice among more casual players, and FanDuel was a full year ahead of its closest competitors in offering the product, although both DraftKings and BetMGM, among others, have since introduced their own version.

Over the next five years, a key area of interest will be how the three companies adjust their marketing to retain their spending edge and thwart competitors from encroaching on their market-share advantage, and how the marketplace reacts to a sports-betting industry that features less splashy promotions and more focus on product superiority.

Companies on the outside looking in hope that a focus on differentiated product and a more level playing field on the marketing front will be enough to catapult them into a respectable market share, but ultimately, in addition to the marketing advantage, the big three companies have also spent heavily on product improvement. Innovation, consolidation and acquisition will happen over the next five years, but at this stage, it is difficult to anticipate the market conditions that would trigger a significant changing of the guard at the top of the order. Many observers have referred to the last five years as the early innings of sports betting, but even if it is only the first inning, FanDuel, DraftKings and BetMGM are already out to a big lead.

IN BRIEF

  • FanDuel emerges as U.S. market leader through heavy marketing spend, strong product offerings
  • DraftKings, BetMGM make up rest of U.S. sports betting "big three"
  • Other brands have daunting task gaining ground on entrenched power players

The Industry’s Unforced Errors

What are the areas where the industry erred and how will those mistakes affect the future of betting?

Although there has been a lot of focus on the success stories of sports betting, including the unprecedented pace of expansion to 37 states (and Washington, D.C.), there are a handful of mistakes that the industry writ large has made that could prove to be crucial going forward.

Arguably the biggest strategic mishap in the U.S. sports-betting industry to date has come in New York.

After years of debate regarding legalization of mobile sports betting, state legislators and then-governor Andrew Cuomo agreed in 2021 to allow companies to competitively bid for licenses to operate in the state. After a complicated process, a consortium that included Caesars Entertainment, PointsBet, WynnBET, Resorts World and Rush Street Interactive pledged to pay as high as a 64 percent tax rate if their group was the only one that was allowed to operate in the Empire State.

Ultimately, the state chose the consortium as well as a second group that included FanDuel, DraftKings, BetMGM and Bally’s, but under the terms of the selection process, the second group had to agree to the same tax rates proposed by the initial consortium, which proposed a 51 percent tax if nine operators were selected. As operators desperately wanted to add New York to their portfolio during a point in time when investors rewarded market-access and total addressable market size, all nine agreed to the 51 percent tax, by far the highest tax in the nation for a competitive sports-betting market.

Although the urge to add New York, the most populous state to legalize sports betting to date, to their profile was understandable, operators then compounded the issue by operating at a steep loss in the state through heavy initial marketing spend to attract market share, with bonuses offered at launch that surpassed the typical offering in many other states.

The result was a staggering success for New York’s state budget, so much so that the tax revenue validated the concept of the high-tax model for the state. Therefore, when companies returned a year later to ask for a tax reduction, claiming that the existing model was unsustainable, legislators paid them little mind, instead focusing on the massive tax revenue that was generated instead.

In some states, the sports-betting industry has scored clear lobbying wins earning favorable terms that result in single-digit tax rates, full tax deductions for promotional play, and widely available licenses.

New York is the total opposite, and although the people of New York are big winners with an infusion of cash into the state’s budget, it serves as a lesson for the sports-betting industry regarding how its zeal for market expansion can come at a serious cost.

That overzealousness of sportsbook operators in the early post-PASPA years has also translated to several missteps in the area of responsible gaming.

One of the biggest is a series of marketing partnerships that several companies reached with major universities. Those partnerships saw the universities effectively act as sports-betting affiliates, with some deals even paying the school for each new player it directed toward the sportsbook operator.

More so than any other strategic error, mistakes in the handling of responsible gaming could be the thing that cripples the industry in the long run.

These deals were criticized at the time, but really became more of an issue when spotlighted in a 2022 New York Times series that was highly critical of the practice.

The Times’ series coincided with an increased focus from both legislators and regulators on marketing toward college students, many of whom are obviously under a state’s legal gambling age. Several states have since enacted rules prohibiting marketing of sportsbooks on college campuses, many of the parties involved in the partnerships have since terminated them, and the American Gaming Association has also prohibited its members from reaching affiliate-type agreements with colleges. But the damage may have already been done. U.S. Senator Richard Blumenthal has been among the critics and has begun to investigate the college-sportsbook partnerships himself.

In addition, the collegiate partnerships issue ties into a more overarching concern, which is a sentiment among many Americans that sportsbook advertising is far too prevalent.

Even five years later, and as operators are dialing back spending, the deluge of sports-betting ads remains noticeable, particularly in key local markets, and public opinion combined with anecdotal evidence indicates that the frequency of advertising may still be too high.

Although the high water mark for advertising has likely already come and gone due to the increased focus in profitability and the few new markets that remain outstanding for launches, the new normal is still enough to attract attention and draw criticism, and more recently, an increased focus has been placed on the types of content included in advertising. Already, legislation has been filed in the U.S. House of Representatives that would prohibit all forms of non-print sports-betting advertising, and although the bill is very unlikely to pass, its existence still looms as a potential threat.

With many states already well past their launch, the focus will now shift toward maintenance of an effective sports-betting model, and perhaps the most important aspect of maintaining that model is an improved focus on responsible gaming issues. More so than any other strategic error, mistakes in the handling of responsible gaming could be the thing that cripples the industry in the long run.

IN BRIEF

  • Operators diving headfirst into expensive NY market looms as long-term strategic error
  • RG missteps like college partnerships also loom as preventable mistakes with long-term consequences
  • Prudent judgement on RG issues remains key for operators going forward

A New Legislative Future

Why have sports betting operators failed to crack the three largest states in the U.S?

Five years in, the low-hanging fruit of sports betting has already been picked. The states that have a real appetite for sports betting and fewer obstacles standing in the way of passing legislation are already well underway with their sports-betting process, if they have not adopted legislation already.

But despite the best efforts of sports-betting companies and massive resources poured into changing the status quo, a regulated sports-betting market still does not exist in the three most-populous U.S. states: California, Florida, and Texas.

California was the site of the most expensive sports-betting battle to date, an intra-industry war between commercial betting operators and tribal casino operators over the future of sports betting in the state that resulted in more than $400m in campaign spending on two separate ballot referendums in November 2022. The result was a complete poisoning of the market and a convincing defeat at the ballot box for the commercial operators where their favored referendum failed to even crack 20 percent of public support.

Commercial operators suffered a similar defeat in Florida after an effort to push for a referendum that would allow companies operating in more than ten states to launch mobile betting failed to even clear the amount of signatures needed to reach the ballot.

Both states are dominated by tribal gaming interests, with a myriad of politically-powerful and cash-rich tribes in California, while Florida is the home of the Seminole Tribe. The Seminoles reached a compact agreement with Governor Ron DeSantis in 2021 that also grants the tribe the exclusive right to offer state-wide mobile betting, but the compact was challenged by anti-casino advocates and pari-mutuel companies and ultimately invalidated by a federal judge. An appeal remains pending, and a favorable ruling for the Seminole Tribe could have a significant impact nationwide on tribes and their ability to offer mobile betting outside tribal lands.

Some states, including Michigan and Arizona, have found a way around the question of whether the Indian Gaming Regulatory Act allows for mobile betting off-reservation by licensing tribes as commercial entities and allowing them to waive tribal sovereignty for the sole purpose of obtaining sports-betting licensure.

However, not every state, nor every Indian tribe, is comfortable with that solution, and some clarity from the federal bench could help smooth future conversations in California, Oklahoma and other key tribal gaming markets, as well as re-open sports betting in Florida, albeit in what would effectively be a monopoly for the Seminoles.

Texas is an entirely different story, driven by a classic industry fight against conservative anti-gambling forces. Despite lobbying efforts from politically powerful professional sports teams, Republican legislative leaders have so far been unwilling to budge in their opposition to any kind of gambling expansion, including sports betting. To enact new legislation, supporters would need a two-thirds majority of the Texas legislature, as well as voter approval, and to date, have only got halfway to meeting the first of those two goals. Texas’ biennial legislative model also creates problems for sports-betting supporters, as it gives them only a short window every two years to build support and momentum for the cause.

These three states represent the biggest prizes for sports-betting operators, but they also represent the biggest challenges. As the last few years have shown, simply throwing money around in each state to brute-force your way in is not the solution. In California, the path runs through the tribes, in Florida, the path runs through the courts, and in Texas, the path runs through the state capitol. For commercial operators, all of those paths are going to require creative solutions if there’s any hope of being able to enter any of the three states for the foreseeable future.

IN BRIEF

  • California, Texas, Florida remain uphill climb for operators for forseeable future
  • Each state has different political challenges that money doesn't necessarily solve
  • Tribal issues remain central in CA, FL, establishing tribes as key power player in U.S. sports betting

Conclusion

The U.S. sports-betting industry has evolved over the past five years to become the largest in the world and an unavoidable part of American sports culture. The taboo that existed when discussing sports betting before the demise of PASPA has been replaced by a desire to promote the activity while avoiding the tripwires that could ultimately trigger more cumbersome regulation.

The next five years will be about maintaining that balance, and it remains incumbent on a variety of different established gaming industry stakeholders, including operators, regulators, lawmakers and those who have become industry stakeholders over the past five years, such as professional leagues, major media companies, and others, to shepherd the industry forward.

Failure to properly maintain responsible gaming activities and turning the public against sports betting, in addition to the social costs, could also come with a significant financial cost to operators who are banking on online casino legislation eventually gaining more support among state lawmakers. Although sports-betting margins have improved somewhat with the popularity of same-game parlay betting and an influx of more casual bettors, online casino gaming is still a significantly more profitable business, and with only a handful of states having legalized the activity to date, is still largely untapped ground.

Ultimately, five years into the new era of sports betting, it is undeniable that the industry has been successful in pushing the most significant expansion of gaming the U.S. has ever seen. Now, for operators, the real work begins.

Can the major spending companies maintain their market share advantage while reducing their spending and become profitable entities? Can a new challenger make moves to secure their own piece of the sports-betting pie? What regulatory challenges will arise over the next five years that threaten the industry’s status quo? Can stakeholders align themselves behind appropriate self-regulatory guidelines and avoid the kinds of onerous policy crackdowns of Australia, the UK and other European markets?

The overturning of PASPA effectively opened the door to a new, multibillion dollar national industry, and that industry must now shift from growing through new state expansion and exorbitant marketing spending into the next phase of its evolution.

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