The Handle is a regular newsletter dedicated to providing the best insights into gaming news. To get The Handle delivered to your inbox, subscribe here.
For those who haven’t been following the industry too closely, the American Gaming Industry (AGA) recently sent a letter to Merrick Garland asking him to crack down on offshore betting. The letter is available here. We wanted to explore that and its ramifications in today’s piece.
The Letter and the Context
Now that gaming is legal in many states, it makes sense that the legal operators would start to get a bit frustrated by offshore operators. The AGA represents the gambling industry as a whole, but we’re going to be zooming in on the sports betting side as that’s where we think we may have something to add to the conversation. The overall premise is simple, and legal operators believe they are entitled to 100% of the pie that originates from regulated American states.
Starting, the AGA makes some fair points about the difference in compliance costs and tax requirements. Long story short, not following U.S. laws and not paying U.S. taxes does indeed have its perks in lowering overhead costs. Surprisingly, the AGA calls out Betonline, Bovada, and myBookie. This certainly isn’t the type of buzz those operators were hoping for. Instead, these operators don’t use the PPH structure we frequently refer to. They operate on a similar system to regulated books with deposit requirements to bet. Nevertheless, they do get away with offering some fun bets that U.S. regulators would never approve, including a litany of fun political bets that we like to take a glance at or maybe bet on if we’re bored.
Again, we’d like to emphasize we’re not taking a normative stance on these offshore operators. We haven’t heard of anyone who has had a bad experience with the three mentioned above. We aren’t directly familiar with people trying to move thousands of dollars in and out of these books regularly. On balance, though, we know plenty of satisfied customers who trust these operators and have had positive experiences.
Next, the AGA cites statistics from a consumer survey showing that American consumers care about using regulated operators. Again, we’d take this with a bit of salt. For example, 74% of respondents said it was important to only bet with legal operators. If I asked people whether it was necessary only to buy marijuana from legal dispensaries, I’d also get a resounding majority in agreement with that statement. If people are happy with the service they are receiving from their current provider, they’re probably not in a huge rush to make a significant change.
Additionally, American consumers are not in legal jeopardy for gambling on sites like Bovada or BetOnline (as long as they follow all applicable laws related to income). This is a bit of a problem with phrasing questions like this. Yes, the bookmakers themselves would be in legal jeopardy if they were to find themselves in the United States, but the American bettors? Indeed not unless there was to be a radical change in the way laws are currently understood. Using the “legal” phrasing can be a bit hazy from a consumer’s perspective.
Of course, there’s some context in the letter on vague societal harms from unregulated sports betting and advertising. However, we think this is a fine line to walk for the AGA. The AGA excites a problem gaming emphasis for regulated books compared to offshore books. We gritted our teeth a bit when reading that. Yes, there are self-exclusion lists, and it’s possible to impose self-selected limits on the regulated sites. But, in reality, it still takes action from the consumer to partake in this. Of course, something is better than nothing, but we’re not sure that’s the hill the AGA wants to die on. Inherently, promoting gambling is going to be associated with more problem gaming. If more people start gambling, there will be more gambling addicts, and we’re not sure there’s a way to convince us otherwise.
Finally, there’s some concern about the viability and reliability of offshore books mentioned. A few examples of offshore books disappearing with money and a long history of DDoS attacks have taken the operators above offline for a few hours or days. Granted, the examples of the former are incredibly far and few between and would not happen with the operators mentioned above. Additionally, the DDoS attacks have resulted in more frustration than lost money. If anything, they are suitable for regulated operators because they demonstrate the importance of using a reliable site.
We’re also a bit skeptical of an FDIC-level guarantee on people’s deposits in regulated books in the United States. We understand that operators must have the liquidity in separate, reserved accounts to make consumers whole in the event of a company failure. But, if push came to shove, we don’t believe that states would use state money to bail out people’s money in their sports gambling accounts if the company itself could not cover it. So, yes, that’s not how it works in practice. BUT, we casually asked a few of our friends who are casual bettors what they thought, and they thought it was an FDIC-style guarantee, so we thought it was worth a mention.
We come down on this because the DOJ should have more important priorities than dealing with the offshore books with relatively pristine reputations. If they happen during a separate investigation, DOJ should take care of it. But regulated operators have significant enough advantages that they should be able to sweep out the unregulated books. Who do we think has a higher cost of capital? Draftkings or a site that’s domiciled in Curacao? Regulated books have enough money to spend to advertise during NFL games, and offshore books don’t! Let’s not forget about the built-in advantages that come with being regulated. Also, there’s apparent prosecutorial discretion in the United States. This means that the executive branch has the power to decide what crimes to prosecute and not prosecute. This doesn’t feel like it necessarily needs to be at the top of the list.
Finally, another point that we should make about the PPH market (which we’ve never actually seen anyone try to size, if you have, please email us!) is that it is generally accessible to people who are 18 or even younger. Of course, gambling shouldn’t be available to people under 18. But if we’re letting people buy lottery tickets at 18, that has a far lower expected value than most sports bets. Additionally, many people start gambling right around the age of 18. Maybe they join a workplace where many people bet on sports together. Or maybe they join a fraternity in college where some of the older kids bet. There’s nothing wrong with this. But if the only option these people have is offshore books, there’s a chance they choose to stick with those unregulated books even after they turn 21. After all, if you wanted to kill the fake ID industry, the easiest way to do it would be to lower the drinking age to 18, not trying to eliminate everyone who sells a fake ID into the United States.
We’ll be keeping tabs on this, but we think it’s more likely to make noise than make a significant impact. Regulated operators should and can outcompete offshore operators. A long article this week! Hopefully, you all stuck around and learned something.
