It's too soon to start high-fiving over legal sports betting in the U.S.
7 Dec 2017
By Vic Salerno
By Vic Salerno
As a long-time casino sports book industry executive, I am amazed by the exuberance of the gaming media and my professional associates regarding the possible repeal of the Professional and Amateur Sports Protection Act of 1992 (PASPA). It is now commonly believed that the Supreme Court will vote in favor of the legalization of sports betting in New Jersey. Although legalization is long overdue, the real heavy lifting has yet to begin.
Assuming that New Jersey and all other states will be permitted to enact sports betting legislation, we must speculate as to how each state and municipality will tax this new revenue stream. The current version of New Jersey's Gaming Accountability and Modernization Enhancement Act of 2017 does not provide a proposed tax rate. However, New Jersey casinos currently pay 9.25% tax on gross gaming revenues, and their online casinos pay a 15% tax rate. I would have to assume that New Jersey would like to make a larger percentage of taxes from sports book revenues. Nevada sports books pay about 6% of their of the revenue in state taxes and a federal tax of 0.25% of handle. Nevada is a friendly environment to conduct business. Illegal bookmakers are not a problem in Nevada because the legal bookmakers offer a competitively priced product, pay timely, and are subject to stringent regulations. Nonetheless, the sports book industry is a very tough area to succeed because of its low profit margins.
In addition, the leagues, networks and others likely expect to benefit financially from sports betting legalization. ESPN sports betting writer, David Purdum, seems to concede that these groups should participate in the revenues, but cautions that all parties are reasonable, when he wrote: "Everyone needs to be willing to take a tiny sliver of a giant pie." It is now time for a dose of reality. While the sports betting business in Nevada creates excitement, and can be a significant draw, it is a minor contributor to the overall bottom-line success of Nevada casino operations. It is a fragile business. Total sports revenue in Nevada for the twelve-month period ending October 2017 was $222.7 million, which is slightly less than 2% of combined revenue for slots and table games. For the period, football revenue was down 41.6% and sports parlay cards (which is mainly football) was down 12.6%.
In addition, the sports betting business is fraught with risk. There are losing days, weeks and months. Sports books, for this period, only retained 3.66% of gross wagers. It is a low margin business which requires vigilant risk management.
The theoretical hold for straight bets in sports in 4.55%. This means that for every $100 that is wagered, the sports book, on average, will make about $4.55 in revenue. Out of this revenue, all taxes and expenses must be paid. The payout odds in sports determine this theoretical hold. That is, for every $11 that you bet on a team, you have the potential winning outcome of making $10 profit. If two people bet $11 each on opposite teams in a game, $22 is taken in and $21 is paid out to the winner. Sports book profits is 1/22 or 4.55%.
The 11/10 relationship is the fundamental business relationship in sports betting. To win $10 in profit, you must be willing to risk $11. This formula is used primarily by all legal and regulated sports books, and perhaps more importantly, it is the standard used by almost all illegal bookmakers.
The imbalance caused by burdensome taxation and payments to all the entities seeking entitlements, or “slivers,” will cause New Jersey sports book operators to move from the existing 11/10 relationship to betting odds that are 12/10 or even 13/10. The probable result of such a decision to change the sports betting odds will embolden illegal sports bookmakers to market their businesses in a more aggressive manner, offering the customer a better deal at the old $11 rate. In this scenario, the black market will flourish, and the casinos will flounder under the crushing weight of taxes and open palms.
Vic Salerno is the president of USFantasy Sports (usfsports.us) and USBookmaking (usbookmaking.com). He is the only sports betting executive in the American Gaming Association’s Hall of Fame. He can be reached at email@example.com