Sports betting lobbyists - including NBA and MLB - ignoring Nevada's bookmaking blueprint

Feb 28, 2018 |
Sports betting lobbyists - including NBA and MLB - ignoring Nevada's bookmaking blueprint
“It’s like the leagues went to the illegal bookmakers and said, ‘Hey, what can we propose to help you guys out?’" - Robert Walker, director of sportsbook operations for US Bookmaking.
Photo By - Covers Media Group
“It’s like the leagues went to the illegal bookmakers and said, ‘Hey, what can we propose to help you guys out?’" - Robert Walker, director of sportsbook operations for US Bookmaking.
Photo By - Covers Media Group

As the Supreme Court prepares to hand down its decision in the New Jersey sports betting case, states around the nation are lining up sports betting legislation, expecting a positive result that will allow them to legally accept single-game wagers and more.

Presently, Nevada is the only state that legally offers single-game wagering, having done so for decades. The state’s regulatory model and sportsbooks’ successful integrity efforts – as proven by sports betting’s tremendous growth in Nevada over the past decade – would seem worthy of emulation by any other state crafting legislation.

However, in many cases, that’s not happening. And major professional sports leagues – led by the NBA and Major League Baseball – are seemingly an influential part of the reason why. The NBA and MLB are seeking legislation in other states that includes a 1 percent “integrity fee” on the total amount wagered – the handle – on their respective sports, among other concessions. Nevada sportsbooks pay no such fee.

NBA Commissioner Adam Silver explained the league’s stance during All-Star Weekend.

“We created in our mind what a model bill should look like. What was included … in that model is a 1 percent fee, call it integrity fee, call it a royalty to the league,” Silver said. “I would only say from the NBA's standpoint, we will spend this year roughly $7.5 billion creating this content, creating these games. Those are total expenses for the season. So this notion that as the intellectual property creators that we should receive a 1 percent fee seems very fair to me.”    

However, while 1 percent of handle sounds quite modest, Nevada sportsbooks in a good year hold 5 percent of handle, and other states can expect similar results. If the leagues get 1 percent of handle, that represents 20 percent of the sportsbooks’ profits.

It’s a point that would seem to show Nevada’s expertise could be helpful to the leagues. The Nevada Gaming Control Board has engaged in ongoing discussions with league officials about the state’s regulatory model, including a meeting just last week. However, Gaming Control Board Chairwoman Becky Harris said that the board is unaware of any lobbying effort in Nevada on behalf of the NBA or MLB with regard to the model legislation those leagues have proposed in other states.

Further, those in Nevada’s sportsbook industry haven’t seen any outreach from the major sports leagues. And based on those proposals in other states, it appears the leagues have little interest in Nevada’s advice.

“We’re not aware of them approaching us,” said Robert Walker, a longtime Nevada sportsbook industry insider who is currently the director of sportsbook operations for US Bookmaking, based in Las Vegas. “It appears they are basically back-dooring Nevada because they know Nevada would say 1 percent is exorbitant.”

As vice president of race and sports at the Westgate Las Vegas, Jay Kornegay operates the Superbook, the largest sportsbook in the world. Kornegay also said he has yet to be approached by the leagues and that industry colleagues have made no mention of being contacted, either.

It’s certainly baffling to Kornegay and his peers, who believe the leagues should look to learn more from the one state with a legal, regulated, successful sports betting model.

“I think it would be in their best interests to know how our industry financially operates before they start working with legislators across the country on sports gaming bills. I’m not aware of any league inquiries at this time,” Kornegay said, adding he’s also seen no outreach from other states yet, but he’s eager for such meetings. “I would like to see that change in the near future on both levels. I hope we can discuss and meet with the leagues and legislators who are considering or processing sports betting bills. I believe it would be a tremendous benefit for all of them to understand the sports gaming industry and how it operates.

“I would think that it would be vital to know how sportsbooks operations work out here in Nevada, how regulated and policed they are. We have almost four decades of experience.”

HANDLE VS. HOLD

In some states currently working on sports betting legislation – again, with the NBA and MLB lobbying for their proposals – it appears there has been little or no discernment made between handle and hold, an incredibly key distinction. Handle is the total amount of all wagers made, while hold represents what sportsbooks win back on the handle – the sportsbooks’ profit.

The conflation between handle and hold in some instances seems intentional, while in others it’s apparent that some of those involved in the discussion have no idea what they’re talking about. That could lead to far-less-than-ideal legislation, with states learning these differences the hard way by falling far short of revenue projections.

For example: In 2017, approximately $4.9 billion was bet on sports in Nevada, and the books won – or held – $248.8 million - just above 5 percent - which again represents an average outcome. The other 95 percent went to winning bettors and sportsbooks retained none of that money.

From the sportsbooks’ 5 percent, a federal tax of 0.25 percent of total handle must be paid, along with the state tax of approximately 6.75 percent of the hold, or about 0.34 percent of handle. So before Nevada sportsbooks can spend a dime for operating expenses – payroll, sportsbook upkeep, technology upgrades, integrity measures, etc. – that 5 percent is already down to about 4.4 percent.

That’s a pretty slim profit margin, along the lines of a fast-food restaurant.

“In fact, we have very small margins and there are a lot of operating expenses that come out of that, including the current regulatory requirements,” Kornegay said.

If the NBA and MLB’s proposed model applied to Nevada – as it might in other states – then the leagues would be paid 1 percent of handle, as well, representing 20 percent of sportsbooks’ profits. Add in the federal and state taxes, and sportsbooks lose more than 30 percent of their profit, right off the top.

And that’s just in Nevada, which has a reasonable state tax on sports betting based on hold – actual revenue – rather than on handle. Any other state that emulated Nevada’s tax and included the leagues’ request of 1 percent of handle would wake up to this reality: the leagues, which generate billions of dollars in revenue annually, would receive three times more money than the state.

“I would tell the states that if you have an outside entity, and that entity is demanding 20 to 40 percent of revenue, that’s 20 to 40 percent that you’re not gonna get,” Walker said, noting 5 percent hold on handle is a generous estimate, and that many books see only 3 to 4 percent profit. “It’s coming right off the bottom line. There’s not much left once that comes out.”

The American Gaming Association, in written testimony presented on February 2 before a New York Senate committee exploring sports betting, pointed out that issue as it relates to the NBA’s proposal in the Empire State.

“The NBA is arguing the state of New York impose a tax on operators based on the amount wagered,” the AGA stated. “The league would have this money bypass state and tribal governments and instead go straight to them. For every dollar bet, the NBA requests a one cent tax. But when sportsbooks only keep five cents of every dollar, that means one cent equals a 20 percent NBA tax on legal sportsbooks.”

For states to come out at least even with the leagues, the state tax would have to be 20 percent of the hold, triple the rate of Nevada. Some states are actually proposing that rate or more, and even “reasonable” states such as Missouri have recent proposals more than double that of Nevada’s tax. For states that opt to be on equal footing with the leagues, sportsbooks would be out 40 percent of profit just on the league and state levies, plus another 5 percent from the federal tax.

Many potential private sportsbook operators could find the league fee and excessively-high state taxes too restrictive to enter the new markets. Others could enter the market and quickly be put out of business.

Further, the latest Missouri efforts make other concessions to the NBA and MLB: mandating sportsbooks use league-approved data providers in determining wager outcomes - allowing the leagues to restrict, limit or exclude wagering in certain aspects - and allowing the leagues access to bettors’ personal information.

The AGA’s response in the New York hearing would ring just as true with any state currently considering sports betting legislation:

“The NBA … proposed several recommendations in its testimony that would directly hinder, not help, the pursuit of the very objectives we both share. These recommendations include an ‘integrity tax’ on sports betting companies, anticompetitive policies regarding sports betting data, and the ability to dictate what bets sportsbooks can offer. These proposals are harmful because they belie an understanding of the economics of sports betting.”

“INTEGRITY FEE” MISNOMER

The AGA’s use of the term “integrity tax” is much closer to an accurate description of what the NBA and MLB are seeking. For the past couple of months, the “integrity fee” was cited as something the leagues would need in order to cover costs involved in monitoring and ensuring integrity in an expanded legal sports betting market. Silver stated that with the expansion of legalized sports betting would come enormous additional integrity expenses for the NBA.

However, as the AGA pointed out, considering that 97 percent of sports betting in the United States takes place with illegal bookmakers or in the offshore market, the leagues most assuredly were already doing such monitoring.

“Under the NBA’s proposal, sportsbooks would be legally required to hand the sports leagues a check to fund integrity services the leagues have long voluntarily paid for,” the AGA noted in its New York testimony.

Going back to Silver’s All-Star Weekend comments, he may have accidentally let the veil slip on the so-called integrity fee. “Call it integrity fee, call it a royalty to the league.”

There’s a big difference between royalty and integrity fee, something New York legislators apparently quickly figured out. Dustin Gouker, writing for Legal Sports Report, noted that in the latest New York bill draft, the fee was lowered from 1 percent of handle to 0.25 percent, and the draft mandated that the funds must be used exclusively for integrity expenses incurred by a sport’s governing body.

But even that much more reasonable “royalty” fails to take into account how the Nevada model works and how the leagues expect it work in other states. As is the case in Nevada, the sportsbooks and state regulators would be most responsible for ensuring integrity.

“My concern is the lack of understanding of the sportsbook business model in Nevada,” Kornegay said. “For example, I’m not sure they’re aware of how much of this integrity protection actually happens with the operators and state regulators. Most of that protection happens at the book, rather than with the leagues.”

Indeed, when a Nevada sportsbook notices any type of unusual betting pattern on a game, that book must notify state regulators, who in turn if warranted would notify the league. Action may be taken up to and including removing that game from the betting board, although Kornegay said that is very rare due to the soundness of Nevada’s regulatory model.

“We want to work with the leagues. We’ve always said we’re on the same side,” Kornegay said. “We don’t want to accept wagers on games whose outcomes might be predetermined. That is one of the reasons we work in such a highly-regulated environment. We have a vested interest in keeping games fair and true. Integrity is our product, as well.”

BOLSTERED BLACK MARKET

Beyond the issue of the integrity fee heavily cutting into sportsbooks’ profits and state revenues, such a fee would almost certainly lead to another major issue: expansion of the illegal betting market. If sportsbooks in states across the country take a 20 percent hit to their bottom line to pay the leagues, that money must be made up somewhere in order for many books to stay in business.

That somewhere would likely be in adjusted prices on bets. For example, the standard price on a side or total in an NFL game is -110, meaning a bettor must wager $11 to make $10. It’s commonly called a 20-cent line. But to make up for that huge loss of revenue, the price may have to adjust to -120 (40-cent line) or perhaps further. The same goes for parlay bets. A typical three-team parlay pays around 6/1, meaning $6 won for every $1 bet. That could drop below 5/1.

One longtime industry insider, requesting anonymity, explained how this will play out for sportsbooks in states that legalize betting under the current outline preferred by the NBA and MLB.

“They’ll capture new players, but over time, those players will realize how hard it is to win with a 40-cent line or more. And they’ll lose some of those players. Those players will realize they could lay 100 percent less juice and bet offshore or with the bookie down the street. Once they get educated on it and understand it, which won’t take very long – especially with social media – they’ll slowly start going different routes. There’s no reason to buy a taco for $3 when you can go down the street and buy it for $1.”

Granted, the difference in price won’t be as much as in the taco example. But a move from -110 to -120 can represent a significant amount of money over time for bettors, especially those who are educated and shop hard for value. States considering agreeing to the 1 percent league fee aren’t only killing a significant chunk of the income they could realize from sports betting, but are helping send that lost income right back into the sports betting black market.

And it could be argued the leagues are doing likewise by seeking that 1 percent fee, while also calling for concessions on allowable bets, mandating data providers and more.

“It’s like the leagues went to the illegal bookmakers and said, ‘Hey, what can we propose to help you guys out?’ And the illegal bookmakers said, ‘Hey, do this,’” said Walker, speaking from 30-plus years of sportsbook experience. “The leagues couldn’t have drawn it up better for illegal books. We have to give them 1 percent of handle, and let them dictate what bets we can take, and let them determine winners and losers.

“If I’m an illegal bookmaker, I’m thinking the new legal sportsbooks are gonna educate players, and then they’re gonna be mine eventually. Their revenue is gonna go through the roof. I never in my wildest dreams thought (the leagues and states) wouldn’t come to us to see what makes sense. The Nevada model has worked. I just don’t think the leagues get that, and they’re going to states where those people don’t understand it.”

WHAT’S NEXT

Nevada has seen explosive popularity in sports betting over the past decade. The annual handle rose from $2.8 billion in 2010 to $4.9 billion in 2017, growth that doesn’t happen if bettors don’t believe the sportsbooks are operating with integrity.

It’s a model that the AGA believes should be replicated by all states pursuing legalized sports betting, from the tax rate to self-regulatory requirements and beyond. Rep. Dina Titus, D-Nevada, said as much this week in an article by Sportshandle.com’s Brett Smiley.

“We think Nevada is the gold standard and that other places can learn from us,” Titus said. “We don’t want other people trying to reinvent the wheel.”

Silver’s All-Star Weekend comments seemed to leave some room for concessions by the NBA, as he said the league would be happy to have discussions on other ways to reach a fair result. And perhaps that’s part of what was at play in the shift in New York’s legislation from 1 percent of handle to 0.25 percent of handle. Further, Dan Spillane, the NBA’s senior vice president and assistant general counsel, expanded on the league’s position.

“We support the passage of a comprehensive sports betting bill that would serve as a model for a 50-state solution – whether that happens in Congress or on a state-by-state basis,” Spillane told Covers via email.

Left unanswered by the NBA was Covers’ specific question:  What parts of the Nevada sports betting regulatory model/sportsbook operation are causes of concern for the NBA? Sportsbook operators are wary of a federal solution that includes the 1 percent fee and applies it to every state. Covers contacted Major League Baseball with the same question and did not receive a response as of publication.

“I think the end game of the NBA is to go to the feds and get the 1 percent integrity tax,” Walker said. “It becomes a federal issue, and then the NBA doesn’t have to fight the states. They don’t have to lobby every state.”

The Supreme Court, as part of its forthcoming decision in the New Jersey case, could fully repeal the Professional and Amateur Sports Protection Act, the 1992 law that ruled out single-game sports betting everywhere in the U.S. except Nevada. That would seem like a welcome ruling, but Walker said if it’s followed by a federal sports betting bill, integrity fee and all, covering all 50 states, that could be just as bad.

“If the NBA is able to pull this off, it would be like PASPA. The industry would still be predominantly a black-market industry,” Walker said. “Right now, I don’t know if I’m rooting for PASPA to go away. I don’t know if that’s a win for the books and the bettors. I’m hoping cooler heads prevail.”

Both the AGA and Walker noted that the leagues would benefit from expanded legal, regulated sports betting through revenue from sponsorships, advertising, streaming and data rights, citing soccer in the United Kingdom as an example.

Kornegay is hopeful that as the process continues – pending, of course, a Supreme Court ruling favorable to expanded sports betting – the Nevada sportsbook industry is sought out by the leagues and other states to play a more prominent role.

“We’d love to have more of a leadership role moving forward, working with legislators and the leagues,” Kornegay said. “The common ground should be a closer relationship between the leagues and the operators, to protect the products – ours and theirs.”

Patrick Everson is a Las Vegas-based senior writer for Covers. Follow him on Twitter: @Covers_Vegas.


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