Lessons to be Learned By Andrew Tottenham, Managing Director, Tottenham & Co December 5, 2018 at 2:45 am The US Supreme Court’s 6 – 3 decision in May of this year, ruling that the Professional and Amateur Sports Protection Act (PASPA) was unconstitutional, has opened the door for sports betting on a state by state basis. Gambling companies are rubbing their hands with glee at the prospect of a massive new gambling market opening up. Estimates for the whole US market vary from US$1 billion at the low end to US$10 billion at the other, with massive confusion over the difference between betting handle and gross betting revenue. Personally, I think the total US market is going to be closer to the first number rather than the last one. Regardless, this bonanza is going to take while to arrive – each state must pass legislation, and laws liberalising gambling are notoriously hard to get on the statute book. The anti-gambling lobby in a state seeking to legalise sports betting will publicise any mistake made by operators or regulators in another state. I can see the headlines now: children maxing out their parents’ credit cards while betting online, people losing homes and businesses, and so on. All of this will slow down online betting’s advance across the USA.I suspect that most of the gambling industry’s effort to legalise sports betting will be directed at online betting rather than creating retail locations. This could eventually present the industry with a serious challenge. The late Professor Bill Eadington used to talk about how gambling has historically had waves of expansion followed by periods of contraction. A period of contraction is a reaction to scandal or the public perception that there is just too much gambling. The wave of land-based gambling expansion in the US that started in the late 1980’s with low-stakes casinos in South Dakota and Colorado, plus Native American casinos, now operating on reservations in thirty states, has more or less reached saturation. When states legalised casinos, they limited them geographically – for example, allowing low stakes casinos only in Deadwood, South Dakota, where in 1876, Jake McCall shot dead James “Wild Bill” Hickok whilst he was playing poker. The Deadwood casinos were closely followed by Colorado legalising $5 gambling in three mining towns. Other states followed, often limiting casinos to riverboats and floating barges. Whilst states have little control over casinos on Native American reservations, the fact that the casinos had to be on reservations again limited their distribution. I believe it is this limit on distribution, and therefore on access, that has allowed gambling to gradually expand in the U.S. over the last thirty years. All that is about to change. Since online gaming will be not geographically limited within a state, it is, in effect, wall-to-wall gambling throughout that state. Opening the door to online sports betting, possibly followed by online casino games, will allow people to bet from their homes and, presumably, on mobile devices anywhere (within the state) where their mobile phone has a signal. In short, in the online world, limiting the number of online licenses does not limit the availability of gambling. Where sports betting is concerned, the US has a great deal to learn from Europe and perhaps the most mature market, Great Britain. Until the Gambling Act 2005, betting in Great Britain was restricted to retail premises and casinos, and limited to approximately 120 licenses in specially designated towns. The 2005 Gambling Act changed that – not only were online betting and casino games specifically legal but also Fixed Odds Betting Terminals (FOBTs) were codified as a machine type, with up to four machines allowed in each retail betting outlet. However, there were no restrictions on the number of betting shops. FOBTs altered the economics of retail betting, allowing the outlets to profitably move from the back streets to highly visible locations on the High Street. The media have complained that betting shops have clustered together on the main shopping streets of towns and cities up and down the Great Britain. It is true that High Street rents have dropped and perhaps some bookmakers have taken advantage of this and moved their operations to more visible locations. But more likely it is a combination of this, stronger branding of their shops since the 2005 Act and confirmation bias, once someone tells you something you tend to notice it. The 2005 Act also meant that the advertising of gambling products became legal, which online gambling benefitted enormously from. Television is a natural advertising partner for online gambling, since it is not location specific. The consequence of this new-found freedom to advertise was that television became inundated with gambling advertisements. Children learned the words and jingles from online gambling ads shown on television. Football teams accepted sponsorship, not just within their grounds but also on their shirts. Children, or more correctly, their parents, have been the biggest buyers of team strips, but children are the wearers. Kids became billboards for gambling companies. The massive increase in the visibility of gambling has led to a backlash. Initially it was the betting industry’s FOBTs in the cross hairs, but now all sectors are vulnerable. The gambling industry has been slow to respond to the criticism, with each sector labelling the others as the “worst” polluter, which has not helped matters. Media and political pressure have forced the regulator to show its teeth. Had the betting companies voluntarily offered to reduce the stake on FOBTs as part of a study to monitor the impact of reduced stakes, they might now be able to offer machines with higher stakes than the regulator’s number – £2. In response to pressure, some of the online gambling companies are voluntarily reducing the amount of advertising around live sports events, and a majority of the Premier League soccer teams are now refusing to accept sponsorship from gambling companies. But will this be enough to stop the anti-gambling force? Probably not. The Labour Party have stated that they would ban all gambling ads during the broadcast of live sports events. I think the issue goes deeper – after 9pm, apart from the main commercial channels, television breaks are full of online gambling ads. Until this changes, the entire industry is at risk. The US has one of the most efficient capital markets in the world. Capital flows where it sees opportunity, and the danger in the US will be that well-capitalised online betting companies will plaster television with their advertisements, aiming for name recognition and market share. When daily fantasy sports was touted as being “legal”, it seemed like every break in a televised American Football game was an infomercial for Fan Duel or Draft Kings. That situation changed when some state Attorneys General, prompted by the sheer volume of ads, took matters into their own hands. If the same happens again, but this time for truly legal gambling, there will not be much the AGs can do. Instead, it will be the public that will cry “enough,” and the consequences for all gambling operators might not be pretty. It would be better that the industry, sports team owners, and media companies in the US come together now and agree on the rules of engagement before they are forced to accept something far worse. Because as sure as night follows day, if nothing is done to limit online gambling, in the words of Professor Bill Eadington, expansion will be followed by contraction.