With the removal of the federal ban on sports betting, it is an ideal time to delve into the potential size of a legal US industry and the companies that could succeed. Through long-fought legal actions brought about by New Jersey, the Professional and Amateur Sports Protection Act (PASPA) has been removed, paving the way for state-level legalization. Montana, Oregon, Delaware and Nevada maintained authority to continue operating betting facilities, being grandfathered in after the 1992 PASPA legislation. Delaware reintroduced a sports lottery in 2009, but the parlay-based lottery system for football games cannot compete with individual game and live betting options. As a result, the state-regulated sportsbooks in Nevada are the only point of reference for modern, legal sports betting in the US. As of June 2018, however, sportsbooks have opened in Delaware and New Jersey, ushering in a new age of sports betting.
The legal markets
Legal gambling activities take place predominantly through three industries: Casino Hotels, Non-Hotel Casinos and Lotteries and Native American Casinos. These combined industries are expected to account for $208.1 billion in revenue in 2018, in addition to employing 784,239 workers and paying $28.0 billion in wages. However, sports betting activities currently only account for a small fraction of total gambling revenue. Even after traditional lotteries are removed from the total revenue pool, these gambling industries generate $128.5 billion. Comparatively, the win for Nevada sportsbooks was $248.8 million in 2017, according to the Nevada Gaming Control Board. Nevada is home to 212 non-restricted sports pool locations as of April 2018. The win percentage on this gaming activity was 5.1%, which implies $4.9 billion in wagers accepted, also known as the handle.
The Global Sports Betting and Lotteries industry is expected to generate $213.8 billion in 2018 and the growth trajectory for the next five years is largely dependent on how the US market changes. From this gambling revenue, IBISWorld expects 48.8% to come from sports betting, which is largely focused on a few countries and a large portion is derived from online wagering. However, while the global market provides a check on scale, specific countries provide a better example of how the US market may develop. The United Kingdom is the best comparison for seeing how a mature national market could develop. IBISWorld estimates that the Gambling and Betting Activities industry in the UK will total £14.4 billion. In the UK, 45.3% is expected to be from remote gambling (i.e. online) and 24.4% from betting shops. According to bookmaker William Hill PLC (William Hill), the largest operator in the UK, mobile devices account for 82.0% of sportsbook revenue for their shops. William Hill also states that of their online revenue (including mobile), 41.0% of their revenue comes from betting and 59.0% from gaming. Using this operator as a proxy, an estimated 43.0% of UK industry revenue comes from sports betting or £6.2 billion.
A wide range of market potential
Looking at the volume of people in Nevada and the sportsbook data helps give a sense of what an average gambler may look like. This may seem high as people are more likely to make bets when in Las Vegas or it may seem low due to competition from other gaming outlets. Nevada, with a population of nearly 3.0 million and a visitor volume of 42.2 million in 2017 is expected to generate about $4.30 per person in daily sports betting. With this estimate, the average sports gambler can be expected to wager $1,563.50 per year. The adult population in the US is over 240 million, however, only a portion of this total is expected to gamble on sports. The Gallup Poll suggests 10.0% participate in gambling, which could be low based on individuals’ hesitancy to admit to illegal behavior. This 10.0% results in a national betting handle of about $38.0 billion; however, if a high estimate of 30.0% is applied, the handle would reach $114.1 billion. While this neglects mobile gaming to a degree, access to mobile platforms is likely to take longer to develop compared with physical locations. Betters can place wagers from their phones in many sportsbooks, but geolocation is necessary and the lack of continuity from state to state is likely to make the growth more expensive. From here, revenue potential is all a function of how effective bookmakers are, which typically means winning between 5.0% and 10.0% of the amount wagered.
Comparatively, using the UK market as a proxy, the result is a very different market size expectation. The UK’s population is estimated to be about 66.0 million compared with the US’ population of 327.0 million. Additionally, the 2016 Gallup Poll estimate can be used in conjunction with an April 2018 UK Gambling Commission survey stating that 6.3% of respondents bet on sports and 7.3% did so in April 2017. This allows for a rough estimate of the completely legalized US market at about $55.0 billion in 2018. It is likely that the response rate would be higher during initial roll-out. This differs from the Nevada estimate, largely due to the size of online gambling in the mature UK market.
Potential impediments to market formation
Estimating the movement of gamblers from illegal to legal markets poses one of the greatest problems when gauging the potential size of the legal sports betting market. For the casual gambler, those who bet on big sporting events or while on vacation in Nevada, the legal market will likely be the best choice of transaction. However, for frequent gamblers, who are used to local bookmakers and off-shore gambling sites, legalization may not be reason enough to switch from illegal markets. Tax implications and familiarity may outweigh the legal risk. Also, the effect of legalization on bookmakers can add additional complications. The federal tax on gaming handles is 0.25%, but each state will have separate tax considerations for sportsbooks. New Jersey rates range from 8.5% to 14.3% of gross gaming revenue, New York is suggesting a 10.0% tax as is Michigan and West Virginia. Pennsylvania has a tax above 30.0% in place. Currently, Nevada has 6.8% tax on gross gaming revenue compared with no tax on illegal activity. Sports betting odds are only based on the bookmakers expected outcome, to a degree, for a variety of bets the odds are largely based on presenting results that balance the wagers on each side, so that the sportsbook makes a profit regardless of the outcome. As a result, different tax costs are likely to drive differences in betting lines. These differences may actually encourage individuals to use both illegal and legal activities to hedge bets and seek out arbitrage opportunities. Additionally, there are significant start-up costs associated with a legal sportsbook. There are hefty licensing fees built into most legislative efforts. Different rules in different states will likely make mobile platforms more expensive to build and monitor. All of this points to a greater position for large operations or keep the door open for illegal avenues that use online platforms hosted abroad and pay per user.
Companies positioned for growth
Despite uncertainty, there are likely to be winners as sports gambling moves forward, such as William Hill PLC (William Hill), with its established sportsbook presence in Nevada and abroad. William Hill has 108 sportsbook locations in Nevada between the William Hill and Brandywine brands. It is well suited to outfit race tracks, which exist in most states with sportsbooks. They have already done so in Monmouth Park in NJ and act as the risk manager for sports gambling in Delaware. Other foreign-based operators do not already have the physical presence that William Hill has, and may be forced to wait for broader online gaming legalization. Smaller operations may not be able to enter the industry due to high licensing costs and risks associated with high taxes. As a result, it is likely that the established sportsbooks in Nevada that are largely run by casino companies will be able to leverage their physical presence in other states. This has the potential to give these operators a head start on any future mobile gaming platform rollouts that may occur.
Edited and designed by Emily Lidstone.
Industry Impact: Casino Hotels in the US; Non-Hotel Casinos in the US; Lotteries & Native American Casinos in the US; Global Sports Betting & Lotteries; Gambling & Betting Activities in the UK
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