Progress Being Made in Quest to Legalize Sports Betting, But At What Cost to Bettors?

Last Updated: 2018-01-24

At least all sides are talking. That remains the biggest takeaway in the ongoing push to overturn the Professional and Amateur Sports Protection Act (PASPA) and pave the way for the legalization of sports betting. The proposals continue to be flawed and require far too many concessions from operators, but, collectively, the ball is moving in the right direction.

Numerous states have already introduced legislation with the expectation that the Supreme Court is going to strike down PASPA, which went into law in 1992 and prohibits state-sponsored betting. Obviously some states, like Nevada, were exempt from the law and continue to take bets on games. Most states fall under the provisions of the act and a lot of those states are considering ways to milk the most revenue out of legalization.

The leagues are doing the same thing. Per a report from Brian Windhorst of ESPN on January 24, the NBA has suggested a one percent cut of every bet made on one of its games. Windhorst goes on to say that one of the league’s attorneys also outlined the league’s wish to have betting made legal on smartphones and kiosks, rather than just at racetracks and casinos. The kiosk and smartphone technologies are all available, as evidenced by the sports betting apps and betting terminals at properties within the state of Nevada that accept sports wagers.

Per David Purdum, ESPN’s top gambling writer, in his January 19 article, the state of Indiana has proposed a one percent “integrity fee” from the operators. Both MLB and NBA were part of the discussions within the state of Indiana.

Here’s the thing – the operators aren’t going to be in the business of just handing over one percent of the handle for each league. That would be $10 from every $1,000 bet. That certainly doesn’t seem like a lot, right? But, think about it from the sportsbook side of things. The sportsbooks try to achieve balanced books on games, to the point where they will make some money regardless of the outcome. In an ideal world, the books would have 100 bets of $1,000 on Team A and 100 bets of $1,000 on Team B. To simplify the math just a tad, we’ll just use 91 percent for the return (10/11 is 90.9%).

The total amount wagered on Team A is $100,000 and the total amount wagered on Team B is $100,000. Roughly $910 per winning ticket would have to go out, along with the original bet amount. The books are only going to hold about $9,000 in this scenario.

As it is, a $9,000 hold on $200,000 worth of wagers is just 4.5 percent. Now the leagues want one percent of the total amount bet, which means an extra $2,000? And, furthermore, that’s just one league. The NBA. What cut does the NHL want? How about MLB? The NFL won’t settle for what the NBA and NHL are getting. Thus far, the NCAA has been pretty quiet on all of it, but we’ve seen the way that states take a cut for education via the lottery. Will NCAA have more of a leg to stand on with the idea that the money will be kicked back into education?

Sportsbooks simply cannot operate under those conditions. The books are almost never going to be as balanced as this example. If the sportsbooks have a run like they did during the 2017 NFL season when favorites covered at upwards of a 70 percent clip, that additional loss to “integrity fees” is going to be even more significant. Also, as we know, not every bet is going to be $1,000. The margins are just too thin to operate in an environment like that.

These basic hypothetical situations really dumb down the wager counts and big decisions that operators face. They’re not going to be willing to simply hand over the one percent fee on top of other taxes and provisions set by the local, state, and federal governments. With every little bit of revenue taken away from the operators, they’re going to be looking for ways to recoup what they’re losing.

The obvious solution for the sportsbooks is to increase the vig. The industry standard right now is -110. For the player, that represents a break-even percentage of 52.38 percent. In order to recoup monies lost by these fees and likely higher tax rates than the state of Nevada, will operators have to go to -115 vig? That is a 53.49 percent break-even rate for bettors. How about -120, which is a 54.55 percent break-even point?

Is the convenience of betting at your local bar or at a sportsbook in your local casino worth an extra 10 cents of vig? Is the safety of knowing that you are betting in a regulated environment as opposed to the loosely-watched offshore market worth those extra 10 cents? Most bettors would probably answer yes. Most recreational bettors would just be happy to play in an environment like that and will trade the two percent disadvantage for a safer, regulated marketplace.

For the bigger bettors, especially those making a living off of handicapping, this would be a very tough pill to swallow and would encourage them to continue betting offshore. Think about it. If you have to risk $11,000 to win $10,000 instead of $12,000 to win $10,000, that adds up over the course of time.

Furthermore, will each state have a different standard? If the vig is -115 in Ohio, where the tax rates are a little lower, and the vig is -120 in Pennsylvania and Michigan, what will that mean for the states? A lot of states originally got casinos because they were losing too many dollars to neighboring states with casinos just outside of their borders. Will Ohio keep its -115 and reap the benefits of bettors crossing the border? Will there be pressure from the other states for Ohio to maintain the same -120 vig as its neighbors? Will it become a federal issue?

There are so many unanswered questions at this stage of the game. What we have seen to date is that the state legislatures are open to discussion and the leagues are increasingly coming around to the realization that this will happen. Unfortunately, those two parties seem to have unrealistic expectations of what they can ask from the operators. If that is the only way that operators can set up shop in those states, the consumer is going to have to pay the difference.

Progress is happening, but it is very slow. Operators are ready to pounce and have likely been creating their own infrastructure behind closed doors so that they can start in New Jersey and some of these other states right away, but the financial framework of legalization is filled with so many challenges that it’s fair to wonder how close we actually are to being able to walk to our local watering holes and throw $20 on a game or swing past the casino and throw a nickel on the home team.

Coming to an agreement that works for all parties is never easy when it comes to dollars and cents, but we’re no longer dealing with intangibles and that’s why we’ll cross the goal line sooner rather than later.

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