States may discover pitfalls with legal sports betting

Some U.S. states have already begun to count the cash if and when sports betting becomes legalized throughout America, but many may end up barely breaking even.

Six reasons why sports betting likely won’t be the big money maker States envision

If SCOTUS either repeals PASPA or allows a way for states to enact sports betting laws without fear of repercussions, it is expected that as many as 32 states will pass a sports betting law in the future. While states like New Jersey and Massachusetts want the law to help generate more interest for their current land-based gambling operations, other states view sports betting as a stand alone money maker.

These states may be in for a rude awakening.

It makes sense for states to offer sports betting in an effort to attract some new interest for their current gaming options, but if states believe they are going to get rich from sports betting, they are sadly mistaken. Almost all states have allotted for a share of the profits in sports betting laws they passed or proposed, but if the profits are minimal it will hardly be a windfall. And the following list are six reasons why sports betting likely won’t be the big money maker many states have envisioned.

First, sports betting in Nevada has not proven to be a real money maker. Only 2% of casino revenue in the state comes from sports betting and the majority of casinos don’t even have a sportsbook, or have an insignificant one. Most Vegas casinos have realized that the revenue generated from sports betting isn’t worth the floor space it takes up since other forms of betting such as slot machines are far more profitable. It’s actually the same reason why most casinos in Nevada have removed their poker rooms. A lot of the larger casinos have kept small poker rooms to attract the younger crowds into the casino but the rake from poker games is small and the amount of space they take up just isn’t worth it, so almost all of the smaller casinos removed the poker rooms. Many of those casino operators may look at the situation and realize the same holds true, particularly if the state is small and thus may not even apply for a sports betting license. For some states like New York or California, there are enough residents and potential sports bettors that even a 5% hold will bring in enough revenue to justify fees and taxes but for smaller states like Iowa or New Hampshire, the amount won from sports betting may not even cover the cost of staff or overhead. In that case, the states may find it difficult to attract operators to offer sports betting.

Second, it could be hard for some states to get balanced action. Nevada is an anomaly because it attracts sports bettors from all over North America and hence bets come in on both sides of a game. But in an intrastate betting model one has to expect there will be a lot of lopsided betting. Games involving home teams or popular teams like the Green Bay Packers or Cleveland Cavaliers will likely receive most of the bets, but unlike sportsbooks in Nevada, the UK or even Australia there will be no other competitors to lay off bets with. If Caesars in New Jersey tries to lay off heavy one way action on the New York Giants for example, with Caesars in Nevada they could find themselves breaking a federal law since interstate wagering is still illegal - unless the Supreme Court throws out the Wire Act as well, which is highly unlikely.

Sports betting profits for state taxesThird, the requirement to declare winnings as income could be a deterrent to bettors. Right now many Americans bet with underground bookmakers or offshore and likely don’t declare income on their taxes. Sites like BetOnline or 5Dimes don’t report player’s winnings to the IRS and Louie the Lip isn’t going to send your information to the government either. Casinos are a different kettle of fish from sports betting because any jackpots won on physical slot machines or any large winnings at the card tables will automatically require the gambler to declare that income . . . and local bookmakers don’t have slot machines. But a lot of bettors have just come to expect that sports betting is tax free. So, a wise guy bettor that nets say a million in profits each year from sports bets will likely find it hard to justify leaving their current outs to bet with a state authorized sportsbook. In the end one needs to weigh the costs with the benefits, and if bettors find that the ease of betting on sports with say Betfair New Jersey isn’t worth the tens of thousands they will lose in taxes, they likely will just stick with the status quo.

Fourth, any integrity fee and licensing fees will be built into the costs of the lines and that could make the betting unattractive. Ten cent lines are still the norm, but many operators have discussed the need to look at  20 or 30 cent lines if they offer sports betting to justify the fees. This could be a big disincentive for sports bettors. Casual bettors probably won’t notice, but larger bettors always look at the odds and if they determine that they can’t make money on a 30 cent line, they will likely look to other options that give them -110 lines and in some instances even better. Even if the fees aren’t too high, there are some offshore sportsbooks that offer reduced vig, cashback incentives and unique prop bets that most state authorized books will find it difficult to match.

Fifth, the NCAA has made it clear it will ask states for an opt out clause and, from the early laws that were passed, it appears that amateur sports may be off the table in most states. Aside from the NFL, college sports are the most popular option for American sports bettors and the inability to bet on it will make state sanctioned sports betting a worthless endeavor. Come bowl season and March Madness bettors will still flock offshore or to Vegas to bet on those games. And more importantly, college sports has generally proven to be more profitable than professional sports. So, the inability to offer amateur sports will cut deeply into profits for both the sportsbook operator and the states.

Lastly, there is still a real question as to whether sportsbook operators will be able to allow players to bet online. The Wire Act still applies to sports betting and the DoJ in the past has argued that the Internet is interstate betting, even if it occurs completely in the state. No doubt online gambling nemesis Sheldon Adelson will try to keep sports betting off the Internet and the courts may declare that any effort to offer online sports betting violates federal law. This will prove to be a huge disincentive to bettors, especially younger ones who won’t be prepared to sit at a casino, sportsbook or at a racetrack to place bets on a game. If that becomes players’ only option, it’s almost certain a large percentage of bettors will just stick with their offshore books where they can wager in the comfort of their homes or at work and also have the ability to bet in-play.

So the U.S. gambling industry is excited about the prospects of legal, state-run sports betting and for some states it may truly prove to be a big money maker. But a reality check is in order. Sports betting will never generate the same revenue as casino games and in some smaller states it may even prove to be a worthless endeavor since the revenue will be so small. It still may be necessary to attract patrons to existing casinos, but it almost certainly won’t bolster state coffers to the degree some states have indicated.

Read insights from Hartley Henderson every week here at OSGA and check out Hartley's RUMOR MILL!

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