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Sports betting in states outside of Nevada may be nearing reality. But that doesn't mean it will be a business success.
Even as major professional sports leagues like the National Basketball Association open their eyes to the multibillion-dollar opportunity, their ideas on how to get a piece of the action may impede the ability to attract gamblers away from illegal betting and offshore markets. The NBA, in particular, is being "short-sighted" in requesting a 1 percent cut on all bets, says Twitter v.p. of Analytics Jeff Ma.
Ma, who was one of the leaders of the infamous MIT blackjack team which inspired the book Bringing Down the House and the film 21, is a well-known expert in the gambling industry. He also understands the inner workings of professional sports leagues — he previously served as a consultant for the Portland Trail Blazers of the NBA and the San Francisco 49ers of the NFL.
"Traditionally, a lot of the leagues are run by lawyers so they think about how do we protect our assets, they don't think about how do we monetize our assets," Ma told CNBC at the recent MIT Sloan Sports Analytics Conference. "In this case, they are thinking protect and charge people money instead of focusing on the bigger opportunity down the road."
The U.S. Supreme Court heard oral arguments to replace the Professional and Amateur Sports Protection Act of 1992 (PASPA) in December, and court watchers read the back-and-forth as a sign that the Court is receptive to state-regulated betting.
Ma contends that a partnership between the leagues and betting operators may be a better alternative. Taking a flat fee off the top could be a feasible option down the road, but only after the legal market develops.
While professional North American sports leagues have historically been against sports betting, the NBA under the leadership of commissioner Adam Silver has arguably been the most radical, supporting the movement with an eye on heavily regulating the market. The NBA and MLB have both expressed a desire to have operators of sportsbooks to pay them a 1 percent integrity fee of total bet amounts.
The NBA has previously defended the reasoning behind the 1 percent fee, including costly compliance measures to mitigate the risk of betting scandals.
In recent testimony submitted to New York State, Dan Spillane, NBA senior vice president and assistant general counsel for league governance and policy argued in favor of a legalized sports betting model in the state that could be used as a model across the country. "Our conclusion is that the time has come for a different approach that gives sports fans a safe and legal way to wager on sporting events while protecting the integrity of the underlying competitions," Spillane stated.
But he argued in his testimony that "Without our games and fans, there could be no sports betting. And if sports betting becomes legal in New York and other states, sports leagues will need to invest more in compliance and enforcement, including bet monitoring, investigations, and education. To compensate leagues for the risk and expense created by betting and the commercial value our product creates for betting operators, we believe it is reasonable for operators to pay each league 1% of the total amount bet on its games."
The NBA has stated that this is a similar approach to legally-regulated sports betting in other international jurisdictions, such as France and Australia.
Dr. Laila Mintas of Sportradar, a company that provides data to the NFL, NBA, NHL and several foreign betting operators, believes that this will add to the challenges of ushering gamblers into the regulated market. "If you put too much burden on the [legal bookmakers], they will not be able to compete with the offshore markets," Mintas said during the same panel discussion with Ma at the MIT Sloan conference.
The argument does cut both ways. MLB Commissioner Rob Manfred this week came out against a legalized sports gambling bill advancing in West Virginia, saying "I want to be clear about this -- we are not opposed to the idea of West Virginia passing a sports betting bill. We'd just like them to pass one that creates a framework that protects the integrity, recognizes the variety of interests at play here and quite frankly puts the state in a position to maximize the revenue return from it."
And the integrity fee is only one of many challenges that will need to be weighed by all the interested parties to make legalized sports betting work as a business model. Mintas noted that setting taxes at a fair rate, for example, is another key issue. The league also has a fair case to make for the value of authentic league data to assist bettors and operators (and states) in a legalized framework.
A recent survey found that 43 percent of Americans have placed a wager on an NBA game in the past, the second-highest mark among all sports. 78 percent of people have placed a bet on a game in the NFL, a league that has publicly tiptoed around the issue of sports betting.
Legalized betting will garner even more interest in the professional sports leagues and viewership could rise with a favorable ruling. The NFL in particular, dealt with viewership issues last season and while there are many theories on why, such as concussions and protests, Ma believes that it has more to do with a change in viewer consumption habits, especially among millennials.
"You're seeing a paradigm shift in the fact that millennials do not like to sit down and watch long-form stuff. It's short-form. It's Snapchat. It's clips on YouTube," Ma said during a panel on gambling at the MIT Sloan conference. "Hopefully the level of engagement that gambling could give could combat that, so that you wouldn't see rating go down," Ma said, adding, "Some people do not like to sit and watch a three and a half hours thing anymore unless there's something vested in it."
Professional leagues in Australia, where sports betting is legal and openly accepted, receive a small, undisclosed percentage of bets made on their sports and the NBA has closely studied its position on gaming. However, Australia has had a relaxed approach to sports wagering since the early 1800s, while in the U.S., it has been much more maligned, leading to an underground infrastructure of illegal bookmakers. Many U.S. betters are comfortable betting with illegal local and offshore bookmakers and the 1 percent tax may deter mature gamblers from utilizing the legal marketplace should the U.S. Supreme Court rule in the states' favor.
"That's a real concern," Ma told CNBC. "There's a lot of reasons that people don't necessarily want to bet legally and if you make it even harder with worse odds and all that kind of stuff, you're creating the wrong situation."
Converting the mature gamblers to the legal markets will be crucial in fully realizing the potential gains of a newly regulated industry. A recent report from research firm Eilers & Krejcik Gaming indicated roughly 12 to 15 million Americans currently participate in illegal wagering and that figure does not include "social" or "casual" bettors that are not frequently placing high wagers on games. The report added that legal sports betting market could approach $6 billion in annual revenue by 2023, something that is based on an estimated 32 states offering sports wagering.
Both legal and illegal bookmakers typically take a commission off of bets, commonly known as "juice" or "vig." On many bets, it runs 10 percent of the wager, though it can vary from book to book, and the juice is only collected if the wager is lost. For example, if Kevin bets $100 on the Jets and they win, he would receive the full value of the bet, but if Kevin loses, he would owe $110 because of a 10 percent commission.
This model is likely to be the case for any sportsbooks that become legal in other states as well, though the exact commission percentage can vary. It's unlikely that the regulated markets will take the 1 percent out of the commission, meaning the cost will get passed along to the betters via adjusted odds.
New Jersey isn't the only state gearing up for the potential multibillion-dollar opportunity. California, Connecticut, Illinois, Indiana, Iowa, Kansas, Maryland, Michigan, Mississippi, Missouri, New York, Oklahoma, Pennsylvania, Rhode Island, South Carolina and West Virginia have all introduced bills opening the door to legalized sports-betting in the future.
Updated for information from NBA on its stance in favor of 1 percent fee to be paid to professional sports leagues as part of adoption of broad legalized state sports betting, and comments from MLB Commissioner Rob Manfred on MLB opposition to the current version of a sports betting bill advancing in West Virginia.