In May 2022, we will mark the fourth anniversary of the Professional and Amateur Sports Protection Act (PASPA) being struck down by the Supreme Court and the subsequent expansion of full-scale regulated US sports betting outside Nevada.
While we have mercifully moved on from many mainstream media outlets citing handle as though it is revenue (though it still happens too often,) some are beginning to have their eyes opened to the margins and economics of sports betting.
Several Arizona media outlets posted stories about state revenue share after its first two months of legal sports betting. Some expressed surprise at the amount that the state kept from the more than $750 million wagered. It has taken nearly four years, but some of the realities of sports betting accounting are coming to the surface.
Expectation versus reality in US sports betting
Sports betting revenue has long been conflated with handle. Much of the blame for this seems to lie with a 1999 congressional report. The report said:
Estimates of the scope of illegal sports betting in the United States range anywhere from $80 billion to $380 billion annually, making sports betting the most widespread and popular form of gambling in America.
The source for these figures was a 1999 Las Vegas Review-Journal article by Robert Macy. The numbers have been widely challenged in the two decades since the report.
The numbers did not originate from any type of academic study or deliberative process.
Hi ho, Silver
NBA Commissioner Adam Silver would inflate the number to $400 billion in his 2014 New York Times op-ed, noting that “some estimate” the size of the illegal market. These numbers were often reported as though they reflected the revenue of illegal sports betting or the industry’s value, which was not accurate.
As widespread legal sports betting appeared to look as though it was on the doorstep, initial estimates for the potential growth of revenue of the industry ranged, but about $6 billion was widely cited as a likely figure by 2023.
Of course, there was a wide range of estimates about just what the legal market might look like in terms of revenue.
States of disappointment
Less than a year into expanded regulated sports betting, the Associated Press ran a story titled: “Most States’ Sports Betting Revenue Misses Estimates.” The primary focus of the piece was on Rhode Island, which had passed sports betting (with a 51 percent tax rate), hoping to receive $1 million a month in revenue. At the time of the AP article, the state was bringing in about $50,000, having failed to modernize to mobile betting with remote registration in its first two iterations.
The article said:
West Virginia is taking in just a quarter of the monthly tax revenue it had projected. Tax revenue is half the estimate in Mississippi and Pennsylvania.
Now some of these issues may have been traceable to obvious problems. For example, West Virginia‘s sports betting app was brought to a halt due to a third-party contract dispute. Other delays and mishaps occurred as well, but these issues alone likely do not justify the outsized expectations that many states had.
A lot less than expected
In D.C., the expectation was that GambetDC would generate $9.6 million for the D.C. lottery in 2020. Instead, it brought in just $352,000.
In Colorado, Pennsylvania, Virginia and elsewhere, state revenues are being devoured by the deductibility of promos. In November, Colorado sportsbooks took in $36.8 million in revenue, but only $19.3 million was subject to taxation after promos were deducted.
Is it all about accounting of sports betting?
The $780 million wagered in the two months in Arizona translated to just over $1 million going to the state. Some back-of-the-envelope math would suggest at a million dollars every two months, the state might come up a bit short of the hoped-for $100 million per year in revenue.
Arizona, like many states, drafted its law with the ability for operators to deduct promos. However, the ability to remove millions in free bets and promos from the gross amount wagered sees states get far less than what many seemed to expect. Like several other states, Arizona likely will sunset these provisions over several years, but the immediate impact significantly eats into what the states get from sports betting.
Not just states surprised
A quick look at sports betting stocks over the last few months would show that many investors are losing enthusiasm for sports betting companies. Many big names are trading near their 52-week lows.
This could reflect an acknowledgment that there is not an endless amount of growth in the US sports betting industry. Sportsbooks are a low-margin business.
The expectation that the industry could somehow see $50 billion in revenue is simply unrealistic. Even if the initial projections of $6 billion in revenue for the sector are doubled, tripled, or even quadrupled, the reality seems as though it could never reach such lofty hype.
What’s ahead in US sports betting?
It remains to be seen if states will catch up on the realities of sportsbook finances. All legislators would have to do is a Google search to see reality versus expectations in many places.
One of the biggest reasons revenue expectations are falling short is the laws legislators are drafting (or at least signing their names to.) Too few legislators are asking the right questions, or at least asking the right people before passing laws.
The industry still has room to grow. But it will never patch all the potholes and pay all the teachers.
There is not an endless stream of money that can continue to flow through sports wagering. The industry has a ceiling.