July reporting brought the US sports betting industry across another big milestone, surpassing $250 billion in lifetime handle since the repeal of PASPA in 2018.
Those bets have yielded more than $20 billion in gross revenue, representing an operator hold of 8.1%. That number, like many in US sports betting, is artificially inflated by a big injection of promotional credits and localized bonuses.
Given the ever-changing nature of the industry, it seems worthwhile to plant a stake in the ground at this spot and look back on the path to this point.
Spread of US sports betting
The US Supreme Court decision to repeal PASPA dropped in May 2018, and preparations were already underway in a handful of states.
Delaware had a pre-enabling law on the books, and it opened the country’s first legal sportsbook outside of Nevada less than one month later. Online betting arrived in New Jersey and West Virginia before the end of the year, expanding to seven more states by the end of 2019.
The Covid pandemic hastened the pace of expansion and adoption, creating a swell in the public awareness of legal online betting brands. It ironically created a perfect storm of market conditions in some ways, with lawmakers seeking new means to generate state revenue and would-be gamblers looking for something to occupy their free time at home.
Legalized operations have today spread to 33 states – 24 of which also allow online sports betting – along with the District of Columbia and Puerto Rico. Nearly 60% of American adults now have access to legal sports betting in their home state.
Note: In this analysis, Florida sports betting is not legalized pending a final resolution in the courts.
Pace to a quarter-trillion dollars
The pace of the industry’s growth over time is reflected in the cumulative financials.
It took more than a year to generate a combined $10 billion in post-PASPA handle, passing that milepost in July 2019 with 10 states contributing to the total. New Jersey was already threatening Nevada atop the monthly reports by that point.
One year later in July 2020, cumulative handle approached $25 billion across 19 states. The list of new legalizers that year included Pennsylvania and Illinois, still two of the country’s biggest markets today. Pandemic-related casino closures in Nevada during this period cemented New Jersey’s newfound lead.
New York super-charges the rate
By July 2021, three years after the initial expansion, running handle surpassed $65 billion across 23 states. By July 2022, with New York added to the group, it was approaching $150 billion.
Reports for this July carried handle past $250 billion in another record year, with New York still reigning as the overwhelming leader. Illinois, meanwhile, seems to have settled comfortably into second place ahead of New Jersey on the podium.
This group of 33 legalized states is now capable of producing more than $10 billion in handle and $1 billion in revenue in a single month.
Actually a bit more handle missing
For the sake of complete accuracy, it is also worth noting that the actual totals are slightly higher than the reported numbers.
Five states have tribal-exclusive retail sports betting operations that do not publish public financial reports:
- New Mexico
- North Carolina
- North Dakota
- Washington
- Wisconsin
North Carolina sports betting will drop off that list in the coming months with its pending expansion into the commercial online realm. There are also tribal sportsbooks that do not report revenue scattered throughout commercial gaming jurisdictions, including in New York, Arizona, Michigan, and a handful of others.
With isolated exceptions, none of these tribal operations provide a needle-moving contribution to the national totals. But that small slice is missing from the reported data.
The season for sports betting
One thing that sets sports betting apart from most other gambling verticals is its drastic seasonality.
Mirroring the sports calendar, US betting volume surges into the late fall and early winter months with NFL betting before pulling back through the spring and summer. Growth over time is therefore most apparent when comparing the peaks and valleys from one year to the next.
Full monthly data from all states is archived on the LSR US sports betting revenue tracker.
The chart helps illustrate why fall is such a big season for the industry. The changing colors usher in the start of the months-long busy season for both sports and betting. Given the expansion of the US market over the past year, legal sportsbooks are poised to set another string of collective monthly records on this lap around the calendar.
Basketball remains the most-bet sport in the country by volume, followed closely by football. Both account for around a third of all reported betting in the country, give or take a few percent. Baseball, meanwhile, only accounts for around 15% of the total volume despite its long season.
States skimming from sports betting
The expansion of legal sports betting also opened an opportunity for states to regulate a new industry and, therefore, to create a new source of tax revenue. The pandemic might have been one catalyst, but the simple promise of increased revenue was enough to get sports betting over the legislative finish line in a number of otherwise unlikely markets.
How much revenue? Not as much as initially expected, but still a fair amount.
In total, states have so far collected more than $3.5 billion in taxes from those $20 billion in gross proceeds. Statutory tax rates range from 6.75% in Nevada and Iowa all the way up to 50% or more in markets like New York and lottery monopolies. The base rate only tells half of the story, though.
Promo effect remains significant
Approximately 30% of US sports betting revenue today stems from promotional credits awarded to customers. That is, in essence, about a third of all revenue coming straight from operators’ own pockets. Given that dynamic, the way a given state treats those dollars goes a long way toward determining the amount of tax revenue it ultimately collects.
New York is one of those on the high end of the rate scale with no permissible deductions, and its cumulative tax haul of $1.1 billion since January 2022 accounts for nearly a third of the national total dating back to 2018. No other state has even collected half as much as New York.
Taken in the collective, state and local governments skim about 18% of the total gross revenue from US sports betting.
Don’t forget Uncle Sam
Unlike most other forms of gambling, commercial sports betting is additionally subject to a federal excise tax. And unlike most other business enterprises in this country, sportsbooks are taxed on the total amount of money that passes through their hands rather than the revenue they produce. For every $100 in tickets they write, Uncle Sam takes $0.25.
That may not sound like a big bite, but consider that customers also win back around $90 of that $100 themselves. The “quarter-percent” tax on handle is effectively more like 2.5% of gross revenue, and it represents a still larger chunk of the net proceeds. Given the tight margins that frame this business and the aforementioned state tax obligation, it is no small burden.
Federal excise taxes collected from the expansion of legal sports betting have surpassed $600 million to date, and that tally does not even include the additional fixed tax that operators pay for every employee on their payroll.
Arguing that states could allocate this revenue more effectively than the federal government, Rep. Dina Titus (D-NV) has repeatedly called on Congress to repeal the federal excise tax.
Where do we go from here?
The industry as it stands today is on pace to approach $120 billion in total handle across all states for this calendar year, its first time reaching into the hundreds of billions. Last year’s total was around $93 billion, and much of the present growth stems from the recent additions of Ohio and Massachusetts.
Pending launches in four more states will bring the count to 38 over the coming year, and North Carolina’s online expansion is significant enough to move the needle by itself. It is a top-10 state by population and one with a particularly passionate base of sports fans.
The overall pace of growth is easing up just a bit, though, as sports betting begins to saturate the nation. After years of unrelenting acquisition, the flow of new customers into existing markets is finally starting to show some signs of slowing down. Some of them even seem to be pulling back a bit, often as a byproduct of expansion in neighboring states.
And in terms of the ultimate ceiling, the pool of remaining states left to legalize sports betting is down to just 13.
Remaining growth opportunities
The most obvious opportunities for future growth hinge on the legislative climate in Texas and California, along with the ultimate judicial outcome in Florida. Given a full implementation, any one of those three markets would quickly supplant New York atop the US sports betting power rankings. Their contributions (or lack thereof) will help dictate the pace for the remaining race toward $1 trillion.
It is also worth wondering about the ways in which the additions of Fanatics Sportsbook and ESPN Bet to the mix could help grow the overall pie of bettors. If all goes according to plan, they could reach a distinct set of prospective customers yet to be activated in existing markets.
Their progress up the leaderboard of US sports betting brands is one of the many key storylines over the coming months.
Tides turning on product, profitability
In broader terms, product development will likely have the biggest impact on the viability and the profitability of the US sports betting industry.
The leading operators have recently begun to shift their focus toward retention, with an eye on balancing the books and clawing back some of the debt piled up in the early turf wars. That $20 billion in revenue is already long gone.
The ongoing change shows up in the data in the form of an operator hold that is steadily increasing over time. Nevada’s historical hold of around 5% appears a relic of the pre-PASPA past at this point, with most states now hovering near double digits with popular parlays leading the way. Taken together, operators are holding close to 9.5% of all bets nationwide.
Parlaying a path to profit in sports betting
So far, the margins haven’t exactly scared away the customers. If anything, the majority of casual bettors actively prefer these high-variance, high-margin markets like correlated parlays and player props. Market leaders FanDuel and DraftKings continue to extract exceptional value from their customers by giving them what they want in this regard.
As the seemingly bottomless well of promotions dries up, however, customers will face tougher choices about which brands to bet with and which markets to bet. As operators become more discerning about their spend, so too will customers become discerning about battling against their double-digit hold.
In some ways, then, the next $250 billion might be more difficult than the first.
