How legalization impacts sports betting economics

The number of states that legalize in the next five years will dictate the potential size of the market. Experts predict that roughly half of states will have legalized gambling in the next five years. Even at 50 percent market penetration, the sports betting revenue potential for both the sportsbooks and the leagues is sizable. More legalized states could mean a larger pool of potential bettors. As average fans become more familiar and comfortable with the idea of sports betting, the market will likely grow, increasing its attractiveness.

One of the key drivers is not only the number of states that legalize but which ones end up legalizing. More populous states like Texas and California would likely have a larger impact than less populous states such as Vermont and Wyoming.

States that have professional sports franchises are also important to watch as legalization bills are brought before state legislatures. Those states likely have the most to gain or lose with franchises operating within their borders. In addition, the magnitude of deals at the league level will be affected by the number of markets where the sportsbooks can expect to activate and monetize their investment.

Each state has the ability to decide whether to permit wagering on mobile devices. The ability to place wagers virtually as opposed to in person is crucial to the development of the market. The legalization of mobile wagering allows potential new entrants into the industry without the large expense of physical assets—making the fight for market share and consumers more competitive.

Additionally, the increased convenience of placing a wager from your couch or a sports bar would be ideal for fans, likely leading to a larger volume of bettors and total handle. Lastly, this would add another sports betting revenue stream for sportsbooks, as they would have the opportunity for targeted advertisements on betting platforms. Sportsbooks and leagues agree mobile wagering is an important aspect of any legalization effort. If this doesn’t happen, it could stifle the growth of a nascent market as fewer wagers would be placed, along with fewer entrants into the marketplace.

There are many other key indeterminate decision points involving the leagues. They are currently lobbying for the ability to opt out of certain bets offered by sportsbooks. This would allow the league to take bets off the board that they believe could be detrimental to the game—especially exotic bets that are decided on a single play and could be susceptible to fraud.

While sportsbooks argue that this would cause a significant loss in sports betting revenue, leagues argue it is necessary to protect the integrity of the game. Sportsbooks maintain they should have the right to offer whatever bets they choose, and any exceptions should be individually negotiated between sportsbooks and leagues as opposed to the government forcing terms upon the sportsbooks.

This decision would go hand in hand with integrity monitoring. Leagues currently want access to the betting data from all sportsbooks for fraud monitoring. Leagues would have a large responsibility with limited experience and would become the primary monitoring source. Leagues have recently begun to shift their focus to individual deals with sportsbooks to generate additional sports betting revenue and address the data and integrity concerns listed above. Although the leagues are still lobbying the government for integrity fees to be written into law, these individual deals represent a potential compromise between the two stakeholders.

Experts agree that the widespread legalization will lead to massive growth of a new sponsorship category. What is less certain is the potential negative impact sportsbooks will have on existing sponsorships deals in other categories. Some companies may not want to be associated with sports gambling entities—financial services firms being one example.

Ultimately, it is likely this new sponsorship category will be a net gain in sponsorship revenue for leagues and teams. However, it will be worth watching how teams choose to activate with sportsbooks and any attempts they make to separate sportsbooks from their existing sponsors. While some international sports associations have banned gambling sponsorships, US sports leagues seem anxious to get a piece of the action. If the negative reaction from existing sponsors ends up being stronger than originally anticipated, leagues and teams may need to rethink their relationships with sportsbooks.

In his majority opinion on the reversal of PASPA, Justice Samuel Alito said Congress has the right to regulate sports gambling if it chooses, but if it elects not to, then each state is free to act on its own. At this point, it seems unlikely that the federal government will choose to regulate sports gambling on a national level, thus allowing each state to make its own decision.

However, this does not mean that the federal government will remain a bystander as the market unfolds. Senators Chuck Schumer (D-NY) and Orrin Hatch (R-UT) have stated that the federal government has an obligation to put some uniform and fundamental regulation in place around sports gambling for any state that chooses to legalize. They recently introduced a bipartisan bill with three objectives:

● Create safety measures to protect consumers
● Preserve the integrity of sporting events
● Ensure the propriety of the sports wagering market

Without such regulation, each state can set its own policies, making it difficult and confusing for leagues and sportsbooks to operate on a national level.