It’s been almost seven years since the Supreme Court overturned PASPA, opening the gates for more states to offer legal/regulated sports betting. Now, 38 states plus Washington D.C. allow sports betting through online and/or retail sportsbooks.
And yet, according to a recent survey by Blask/Next.io, the unregulated offshore betting market is still twice the size of the U.S. regulated market.
Relatively speaking, that’s actually a massive improvement. Seven years ago, the American Gaming Association estimated the unregulated market was 30 times larger than the regulated market. Still, the current 2:1 disparity points to problems that are no surprise to industry insiders and sports betting experts.
Legislators and regulators aren’t keen to admit it, but massive barriers to market entry exist in many states. Those come via exorbitant licensing fees, excessive tax rates or overly burdensome regulations. Or a combination of all three.
Ultimately, those only stand to benefit the unregulated/offshore market.
The Four Cs
The pseudonymous Jack Andrews – perhaps better known as Capt. Jack Andrews – is a longtime advantage gambler and serves as head of content for Unabated Sports. He’s seen the evolution of sports betting in the United States, from the massive unregulated market pre-PASPA strikedown to regulated sports betting’s development since the May 2018 Supreme Court decision.
Andrews is certainly an advocate for the U.S. legal/regulated market, but he also understands what it takes to make that market truly competitive with the offshore market.
“The three advantages that the regulated market has over offshore are the four Cs: Consumer confidence, convenience, competitiveness,” Andrews said.
However, without sound legislative/regulatory/tax policies, that C-list can take a beating. For example, just to get access to the New York online sports betting market, an operator first must pay a $25 million one-time license fee. Very few sportsbooks can pony up that kind of cash.
“This erodes the competitiveness of the market,” Andrews said. “Competition breeds innovation, and that’s the tide that lifts all boats. Consumers become more engaged, operators invest more into their products, and states benefit from the increased tax revenue of a thriving industry.”
Jumping Ship
But many U.S. jurisdictions seem more inclined to strangle competition. DraftKings and FanDuel dominate the landscape, and Caesars Sports and BetMGM are big players, as well. ESPN BET is trying to angle in on market share off its association with the massive ESPN brand, and Fanatics Sportsbook aims to do likewise with its link to Fanatics apparel and collectibles.
The market licensing fees, taxes and regulatory mandates squeeze out smaller regulated operators, some of which offer attractive odds and innovative products, such as Circa Sports, Prime Sportsbook and SportTrade.
“When you sin-tax a market, you are encouraging it to shrink, which makes it cost-prohibitive to expand,” Andrews said. “The consumer is still going to sin, though. They’ll just find wherever the innovative market exists.”
If odds become unattractive from limited operators in, say, New York, then consumers will look outside that market for more competitive odds. And convenience is king, as well. The offshore/unregulated market is an easy jump while seated on your couch, using the phone in the palm of your hand.
“With sports betting, there’s very little friction preventing consumers from going offshore or to a non-regulated operator,” Andrews said.
Behind The Counter
Circa Sports opened in Las Vegas in 2019 on the main premise of catering to sharp bettors while taking all comers. Since then, Circa has proved that its model works, booming in Nevada and also operating in Colorado, Illinois, Iowa and Kentucky.
To those states’ credit, their licensing fees and tax/regulatory structure allowed for such expansion. But those states are a small piece of the regulated sports betting pie in the U.S.
There’s no question that New York consumers – and those in many other states, for that matter – would benefit from Circa’s model. But between New York’s $25 million license fee and a whopping 51% tax on revenue, the math comes nowhere near penciling out.
“It costs a lot of money to get into some of these states,” Circa Sports director of operations Jeff Benson said. “Market access isn’t cheap. So many people have their hands in the cookie jar. It makes it difficult for the mom-and-pop-style sportsbook to expand.”
From 1996-2008, Robert Walker was at the pinnacle of the U.S. regulated market, heading up MGM Resorts sportsbooks, which were not mom-and-pop shops. That was when Nevada – primarily Las Vegas – was ostensibly the only place in the nation where one could legally bet on sports.
Walker has long since moved on to other projects, well before the 2018 PASPA decision. But from that decision, he anticipated that subsequent legislative/regulatory moves would make it much harder for the regulated market to overtake the offshore market.
“Those are all significant components, anytime you put in [excessive] barriers,” Walker said. “And there’s still the possibility everybody will raise sports betting taxes again. And they will.
“Every state is looking for money, and sports betting is an easy target,” Walker continued, noting sportsbooks’ biggest error came in the Empire State. “We accepted 51% in New York.”
By comparison, that made other states’ rates of 20%-30% seem reasonable, but even those levies are too big to overcome for all but a few big operators.
Recouping Costs
With massive licensing fees and high taxes, sportsbooks have to somehow recoup that money in an attempt to turn a profit. More and more, that’s done through pointing consumers to parlays and, these days, same-game parlays.
Odds on those bets often aren’t exactly consumer friendly, and sportsbooks’ hold rates on such wagers are several times higher than on straight bets. As the old saying goes, parlays are a bookmaker’s best friend — same-game parlays even more so.
At some point, consumers will get price-sensitive and look elsewhere. That’s at least one reason why, as the Blask/Next.io survey pointed out, five of the top 10 sportsbook brands across the U.S. are offshore operators:
- Bovada
- BetOnline
- BetUS
- Ignition Casino
- Brango
In fact, Bovada is No. 1, ranking ahead of DraftKings and FanDuel, who are Nos. 2-3 respectively. And BetOnline is No. 4. Walker said it’s actually impressive that offshore books only outpace the U.S. regulated market by a 2:1 margin. The pendulum could swing even more toward the unregulated market as consumers get more and more savvy.
“Sportsbooks cannot hold that kind of percentage indefinitely and expect the bettors to keep coming back,” Walker said. “You’ll buy a gallon of milk at 7-Eleven every now and then, but you’re not gonna do all your shopping there. Bettors might be novices now, but they’re gonna get more experienced, and they’re not gonna continue to throw their money away.”
All that noted, Walker also made another salient point about why the unregulated market still laps the U.S. regulated market.
“The other part is that California and Texas are huge states that don’t have legal sports betting yet,” he said. “In California and Texas, if you’re going to bet – and people are betting in those states – you’ll bet with whomever is available.
“And if you’re betting with Bovada or BetOnline and you’re happy with it, why would you change? There’s no reason to leave.”
So, it would behoove California and Texas to implement legal/regulated sports betting. But even if that happens, Walker expects the barriers to entry to be ridiculous. That takes us back to the final component of Andrews’ aforementioned C-list.
How To Compete With Offshore Sportsbooks
If U.S. sportsbooks are to continue making a dent in the offshore/unregulated market, then it will require sincere rethinking by legislators and regulators. The current path is only serving to shrink markets, which doesn’t serve consumers well.
“Less competition is the worst part of this scenario," Walker said. "It affects the pricing, the odds. If this model persists, if you pass that on to the customers, then they’re eventually gonna go offshore."
Added Circa Sports’ Benson: “If you want to see that gap lessen, then new states and existing states have to put in rules and regulations that allow regulated sportsbooks to compete with the offshore market.”
Current policies have a tendency to do just the opposite, and consumers are noticing.
“The whole point of legal, regulated sports betting was to bring it onshore,” Benson said. “The regulators don’t understand this, and that ultimately moves people into the gray market.”
Until and if sports betting isn’t seen as some golden-goose cure for all that ails state budgets, the gray market will continue to thrive.
“Everybody wants their own cut,” Benson said. “They’re not thinking about what’s good for the industry. They’re thinking about what’s good for their pocketbook.
"We’ve still got a long way to go.”