One of the biggest decisions a state must make when legalizing sports betting is determining which agency is best suited to regulate and oversee the new industry. In many jurisdictions this boils down to choosing between the gaming/casino control commission — or the state lottery. This very decision has long been the wedge in Ohio, where lawmakers are moving toward legalization later this year, but the tug-of-war on the issue between the House, Senate, and Governor’s office has so far made consensus elusive.
One theme has emerged and gotten underscored, roughly 28 months into the post-PASPA era of legal sports betting across the U.S.: Where the lottery agency manages the sole sportsbook platform available, or at least has skin in the game, revenue appears to be falling short of what probably would flow through a more open, competitive marketplace.
Of the 21 continental U.S. jurisdictions that have legalized in some capacity, nine have chosen to task lotteries as regulators. And of those nine, the Lottery is the sole purveyor of sports betting in two jurisdictions. In at least three others, lotteries can offer a sports betting product alongside commercial platforms. In Oregon and Montana, only the lotteries are currently permitted to offer sports betting, while in in Delaware, New Hampshire, and Washington, D.C. the lotteries can or are already offering their own products in marketplaces that also involve commercial operators.
Lottery as regulator popular among small states
Tennessee and Virginia, both legal but not yet live, will be regulated by their respective state lotteries. In Tennessee, the Lottery will act as a regulator only, and will not have its own product. The Lottery is poised to launch up to four operators on or before Nov. 1. The Virginia Lottery will also act only as a regulator, and plans to launch sports betting in early 2021. Neighboring West Virginia is the only state with live legal sports betting in which the lottery is the regulator, and does not offer its own product.
By population, Tennessee (6.8 million people) and Virginia (8.5 million people) will be the biggest “lottery states” to go live since the Supreme Court overturned the Professional and Amateur Sports Protection Act in May 2018.
Oregon, with a population of 4.2 million, is so far the biggest U.S. jurisdiction with legal sports betting regulated by a lottery. The other five have populations of 1.8 million or less. Another similarity among jurisdictions that have chosen to have the lottery as regulator is gaming history — Montana, New Hampshire, Tennessee, Virginia, and Washington, D.C. had little or no commercial gaming infrastructure when sports betting was legalized. Delaware had horse racetracks and racinos, Rhode Island had two retail casinos and West Virginia had five retail casinos.
One lottery state lost money in its first fiscal year of operation, and a second took in only about 15% of its initially projected revenue. The two most recent online lottery offerings are showing small profits in short timeframes that included several months of cancelled sporting events. It would be fair to say that against the coronavirus-era sports landscape, sportsbook operators in most every state — whether lotteries or commercial operators — aren’t seeing the kind of numbers projected for 2020.
Indeed, it’s important to note that sports betting operators around the world were in a unique situation March-June 2020 due to coronavirus shutdowns and the postponements of most major professional sports. That situation skews the numbers as does the return of U.S. professional sports in July and August, during which there were some weeks during which all four pro sports were playing at the same time, giving bettors an unprecedented amount of choices.
Stakeholders argue that states with lotteries as regulators are leaving money on the table — and in some cases, losing money — in addition to sometimes creating oddball situations within which operators must function (i.e. in Tennessee, there is a 90% payout cap, and in Rhode Island, the operator International Gaming Technology, is a “partner” with the state).
“I would say generally speaking, that competition in the gaming space will lead to more innovation and competitive pricing,” said gaming consultant Sara Slane. “Without those two pillars, it is hard to imagine a scenario in which the illegal market gets stamped out. Policy should always be created around the premise of strangling the illegal market and competing with offshore websites which pay no taxes.”
Oregon’s Scoreboard lost $2.8M in first year
The best example is Oregon, which has a population of 4.2 million people. The only commercial sports betting is through the state’s Scoreboard app, which launched in October 2019. (A few tribal casinos offer sports betting on casino premises.)The app had plenty of hiccups at the beginning, and after eight months in operation, posted a loss rather than profit to the state.
Oregon’s ScoreBoard app, as reported by Willamette Week in February, was projected to earn $6.3 million for the state in FY 2020 after its October 2019 launch, but instead was headed to a $5.3 million loss. The actual loss turned out to be $2.8 million, but in the first two months of FY 2021, Scoreboard had made about $500,000 for the state. Should Scoreboard post similar returns in September and October, it will still show a loss of about $1.8 million in its first calendar year.
— Focus Gaming News (@FocusGamingNews) September 22, 2020
For comparison, the two states with legal sports betting that are closest to Oregon in terms of population are Iowa (3.2 million) and Colorado (5.8 million). Both are regulated by gaming or casino boards and have multiple commercial operators. In the last eight months, Iowa sportsbooks have paid the state $838,585 in taxes based on a 6.75% tax rate, and between going live on May 1 and July 31, Colorado sportsbooks have paid the state $555,427 based on a 10% tax rate.
“The underwhelming performance and low consumer satisfaction in jurisdictions with sports betting monopolies should force a re-examination of the policy and serve as a cautionary tale for future states,” another industry source told Sports Handle. “If we have learned anything in the early life of the U.S. sports betting, it’s that competition breeds the most successful markets.”
While start-up costs and glitches are usual fare for any new venture, Mark Canazarro of the Oregonian posits that banning betting on college sports is the real culprit. Unlike the many states that prohibit betting on local college teams, Oregon’s ScoreBoard app is for betting on the pros only. Iowa and Colorado both allow betting on college teams.
As a sidenote, stakeholders consistently point to any kind of ban — whether it be on local college teams, all college teams or Olympic sports — as a reason for bettors to head to or remain on the black market. In Oregon, the sweeping ban could well be keeping bettors from switching to the legal market because they can get only a portion of their desired action there.
Will Montana Lottery show profit or loss?
Oregon’s monthly financial reports don’t show a loss, but the reports only include handle, GGR, and hold, not expenses.
“The ability to offer collegiate wagering would speed our progress towards profitability–increasing revenue with very little additional expense,” Oregon Lottery spokeman Matthew Shelby told Willamette Week. “But there doesn’t seem to be much appetite for that in the Legislature.”
Six months into legal sports betting in Montana, the Lottery isn’t seeing the kind of returns it hoped for. FY 2020 is not a good example because the Lottery went live in early March with retail sports betting only, and days later stay-at-home orders were imposed and professional sports leagues shut down. The Montana Lottery offers sports betting via kiosk at thousands of Lottery retailers throughout the state, but online/mobile sports betting is not legal there yet.
According to a lottery spokesperson, between the March 9 launch and Sept. 24, bettors had wagered $6.2 million on SportsBetMontana and $5.43 million was paid out to winners, leaving $770,000 in GGR. Of the $770,000, the state gets 60% and 40% goes to Intralot, which powers the platform/kiosks. In hard numbers, the state has so far received $462,000. From that it has paid out $372,000 to retailers, who by law get 6% of handle. That leaves the Montana Lottery with $90,000 in profit over six months.
While that number may sound low, Montana Lottery officials say SportsBetMontana is doing exactly what was intended — generating income for both retailers and the state.
“Part of the benefit to the state is the benefit to the retailers,” said Lottery spokesperson Jennifer McKee. “The law was designed to benefit our businesses.
“That $372,000 back to businesses is what keeps the lights on and people employed, and that’s what part of the benefit is.”
Sports betting in Montana gains momentum with kickoff of NFL season https://t.co/g0nJQsok7D
— Craig Jones (@crajones1) September 17, 2020
In Montana, lawmakers brought both lottery and commercial bills to Governor Steve Bullock, who vetoed the commercial bill — which includes a statewide digital component — out of what he called an abundance of caution.
“For the market to succeed, Montana needs to enter the sports wagering market conservatively-adopting only one of the two models now,” Bullock said at the time. “If, in two years, the market can tolerate more entrants, then I fully expect the legislature will revisit whether a second model is prudent for our state.”
There are no states with similar populations to Montana and Rhode Island (both about 1.1. million people) that offer sports betting with a gaming board as regulator. But for comparison, West Virginia (1.8 million people), which regulates, but does not offer its own product, brought in $255,882 in tax revenue from March-August, according to Sports Handle‘s handle, revenue and tax database. Both New Hampshire and Rhode Island cut sweetheart deals with operators to get 51% of gross gaming revenue. For the period of March-July, DraftKings paid New Hampshire $1.62 million and Rhode Island got $757,540 in revenue in a similar deal with IGT and William Hill.
But Rhode Island didn’t always have such success — in February 2019, sportsbooks in the state lost $900,000 when the New England Patriots won their sixth Super Bowl. For FY 2020, Rhode Island sportsbooks brought in $18.7 million in revenue, and that state got 51% or $9.5 million of that. In 2019, Rhode Island sportsbooks had revenue of $6.9 million and the state got $3.5 million. Both numbers fall far short of Gov. Gina Raimondo’s initial $23.5 million budget projection, and the backed-down $11.5 million projection that made the rounds in early 2019.
While it is not clear that the state lost money — start-up costs for FY 2019 were not available — revenue hasn’t been anywhere near what the state hoped it would be.
GamBetDC turned a profit in first 90 days
There is proof in almost every legal sports betting state that the more widespread the competition and the more available the opportunity to place a bet, the money there is to be made. And yet many lottery states continue to opt for a monopoly.
Washington, D.C. is one such jurisdiction. The D.C. Lottery was prepared to launch its app in March, but due to COVID-19, delayed until late May. Through Aug. 31, bettors had wagered $3.1 million and GamBetDC had paid out $2.65 million, leaving about $456,166 in GGR. The Lottery paid out an additional $193,296 to sports betting operator Intralot for operating the platform, managing the trading, and assuming risk on wagers, according to a D.C. Lottery spokesperson. After expenses, actual profit for about 90 days of live sports betting was $262,870 for the District.
It’s easy to blame the pandemic for the slow start of the D.C. sports betting app. But the limited sportsbook at Capital One took far more bets in-person during a pandemic, showing the city’s problems run deeper https://t.co/7kj6lzt5Lr
— Fenit Nirappil (@FenitN) September 17, 2020
The Lottery’s GamBetDC is a “no-risk” venture, meaning that Intralot assumes all the risk for sports betting. Because of that, payouts are capped, and many don’t consider the odds to be competitive. For the D.C. Lottery, this could become a major issue once statewide mobile is in place in neighboring Virginia (projected in January 2021) and if Maryland voters legalize in November. Both states will have more open, competitive marketplaces, which translate into better odds for consumers.
“I think that the theory that the lottery should be managing it, well, I don’t think the lottery is equipped to run sports betting,” 888 Head of Commercial Marketing Yaniv Sherman told Sports Handle. “It does not move people to the legal market.”
Sherman was recently D.C. recently and said he struggled to download the app and fund his account — two issues that will quickly drive prospective consumers elsewhere.
The only other sports betting currently live in D.C. is in person through the William Hill Sportsbook at Capital One Arena. The book wrote $9.13 million in bets in August (it opened on July 31) and paid the District $142,000 in tax revenue for a single month. Combine that revenue with GamBetDC’s $262,879 early profits and that’s a far cry from estimates from the city’s Office of the Chief Financial Officer, which projected sports betting revenue could top more than $91 million in its first four years.
Only game in town can mean consumers look offshore
Delaware and West Virginia are slightly different from the other five lottery jurisdictions. While the Delaware Lottery does offer a sports betting parlay game, like the West Virginia Lottery, it primarily serves as a regulator. Delaware also does not have statewide mobile/online sports betting. In West Virginia, the lottery doesn’t offer its own product, and X operators are vying for customers, both online/mobile and in person, and assuming their own marketing expenses as they compete. BetMGM, DraftKings, FanDuel, IGT and William Hill all have live digital platforms.
When taken in total, it appears that states in which lotteries are the regulators — whether or not they offer their own product — can be successful. New Hampshire and Rhode Island are the best examples, though it’s important to note that in both states, regulators were able to cut good deals with operators.
But states considering legalizing would be wise to look at what happened where the Lottery is the sole provider of sports betting — and in two cases where Intralot runs the platform. Though things could turn in Oregon or Washington, D.C., where the lottery will be the only mobile game in town, the early going shows that start-up costs, vendor fees and other variables can take a bite out of profit.
But in both Washington, D.C. and Montana, where Intralot runs sports betting, the prices are unattractive in some areas, if not overwhelming, and according to industry sources, souring bettors on using the products. New Hampshire will become the third state to use an Intralot platform when it launches its lottery sports betting product. The difference in pricing and markets available will likely show a stark contrast against the DraftKings platform that is already operating in the state.
New bettors in D.C. These odds (prices) are like paying $2 for a gallon of gas, while other states are only charging a $1.
— David Payne Purdum (@DavidPurdum) May 28, 2020
“At the end of the day, competition breeds improvement … the worst part of the lottery based (sportsbooks) is that their odds are so much worse than offshore books offer,” 888’s Sherman said. “Pricing is part of the product and when you offer worse odds like the French regime or the Tennessee one, you end up with a hamstrung market that won’t grow very fast.”
Many of these variables are familiar to long-time sports betting operators, but can be a challenge to those new to the sports betting business (i.e. lotteries). In addition, in D.C,, Oregon, Montana, New Hampshire, and Rhode Island, being the only game in town often translates into odds that are less competitive than those offshore, driving consumers to the black market.