The fall of PASPA opened the floodgates for legal sports betting in the US, and ever since, states have become individual Petri dishes of sports betting models. The state-by-state approach has produced dozens of uniquely structured sports betting industries, with some states faring better than others.
A market’s success or failure is complex, hinging on a combination of often interconnected factors. States have no control over some elements, such as the cost of advertising in different media markets, the local sports and gambling culture, and sports betting’s legality in neighboring states with large border populations.
That said, there are many factors states do have control over. This column looks at four factors the state can control, each of which contributes significantly to a market’s success.
Online Betting Restrictions
Nothing will torpedo a state’s sports betting industry faster than restricting online betting.
Retail betting has hard-to quantify ancillary benefits, but online betting is an absolute must from a handle and revenue perspective. Further, any policies restricting online betting will negatively affect the market, often severely.
A retail-only approach is the biggest blunder, but in-person registration requirements aren’t benign.
New York, which launched online betting sites in January 2022 after two-and-a-half years of retail betting, clearly illustrates the shortcomings of a retail-only model.
The state’s monthly sports betting handle fluctuated between $9 million and $25 million in the 12 months leading up to the state’s online launch. In its first month of online sports betting, New York tallied $1.7 billion (that’s billion with a B) in handle.
The impact of in-person registration requirements varies from state to state, as the number of casinos and their proximity to population bases will lessen or exacerbate the inconvenience of the policy.
Iowa is one example of how impactful an in-person registration requirement can be. When Iowa dropped its in-person registration requirement in January 2021 (a year-and-a-half after the state’s sports betting industry went live), the Hawkeye State saw an immediate 50% increase in wagers month-over-month.
Tax Rates and Licensing Fees
State-imposed operator burdens like tax rates and licensing fees are something of a balancing act. Set them too low, and the state’s cut of sports betting revenue amounts to what Richard Schuetz calls budget dust. On the other hand, set them too high, and you not only scare away potential operators, but you also force participants to cut down on their marketing spend and push costs onto customers.
The good news is the sweet spot for tax and licensing burdens is wider than Bill Miller’s strike zone in Game 5 of the 2017 World Series.
Operators seem comfortable with anything under 15%, and even 20% doesn’t seem like a dealbreaker. However, once the rate creeps above 20% in open markets (operators will accept much higher rates if they have a monopoly), the grumblings begin, and when it gets above 25%, you start to see operators get cold feet.
Once again, New York does an excellent job telling the story. The state currently represents the most significant opportunity in US sports betting, yet the state’s 51% tax rate and eight-figure license fee limited the number of applicants.
New York’s tax rate is so high that one of its chosen licensees, Bally’s, has publicly pumped the brakes on launching, calling the current market conditions “insanity.” It’s hard to disagree, considering the cost of doing business in the market makes it difficult to envision a path to profitability under the current advertising and taxation conditions.
Examining the amount wagered per resident in established markets (albeit handpicked) gives an idea of how impactful the taxation rate can be, particularly when the effective tax rate is the metric.
| STATE | TAX RATE | EFFECTIVE TAX RATE | HANDLE PER RESIDENT* |
| Rhode Island | 51% | 51% | $55.35 |
| Pennsylvania | 36% | 24% | $62.01 |
| Tennessee | 20% | 16.9% | $56.53 |
| Colorado | 10% | 4.5% | $99.62 |
| Indiana | 9.5% | 9.5% | $74.29 |
*Handle per resident calculated from January 2022 revenue report numbers
Open or Closed Market
Another significant factor in a market’s success is how open the market is, or more simply put, how many licenses and skins the market allows. In a general sense, the more operators, the better the market will do as a whole, although there is likely a point of diminishing returns.
Open, competitive markets are consumer-friendly, with operators fighting for market share through promotional dollars and advertising that helps raise consumer awareness.
Monopoly markets (most run through the state lottery) haven’t fared well:
- Rhode Island, January 2022 handle per resident: $55.35
- New Hampshire, January 2022 handle per resident: $73.19
- Oregon, January 2022 handle per resident: $10.17
- Washington DC, January 2022 handle per resident: $8.28
It should be pointed out Rhode Island and New Hampshire both benefit from Massachusetts residents crossing the southern and northern border to place bets.
Compare the above numbers to wide-open markets, and there’s no comparison:
- New Jersey, January 2022 handle per resident: $151.86
- Colorado, January 2022 handle per resident: $99.62
- Virginia, January 2022 handle per resident: $56.88
- Indiana, January 2022 handle per resident: $74.29
Prohibitions On Certain Bets
Many states have also restricted certain forms of betting. These prohibitions range from in-state college games to eSports to specific prop bets.
These prohibitions are best defined as “feel-good” restrictions, as they don’t prevent the activity. They push it underground. So rather than protecting the integrity of the games and contests through transparent, regulated sportsbooks, these restrictions make malfeasance harder to detect. This flies in the face of two often stated goals of legal sports betting, moving players from black markets to legal markets and game integrity.
Nor do they help a state achieve another primary objective, tax revenue. These betting prohibitions take a revenue toll in two ways.
First, potential bettors interested in wagering on these events can’t bet through legal channels, which means they are far more likely to bet on these events through illegal channels. In so doing, they are also more likely to use bookies and offshore sports betting sites to place their other wagers.
As such, the state isn’t merely missing out on the prohibited bets. It’s losing all the bettor’s wagers.
Upshot
The takeaway is that while there isn’t a silver bullet to success. And more importantly, states can self-sabotage in a variety of ways.
All states have to do is follow the roadmap that is already in place:
- Authorize online betting without unnecessary restrictions
- Set tax rates and licensing fees at reasonable levels
- Create an open, competitive market
- Don’t install “feel-good” prohibitions on certain types of wagers
