The gambling industry is abuzz this week with the news that New York is finally poised to expand sports betting. Unfortunately, the buzz sounds more like a nest of angry hornets than the pleasant hum of progress.
The plan, strong-armed into existence in the 11th hour by Gov. Andrew Cuomo and reluctantly approved by the General Assembly, rejects the successful model found across the majority of US states. In its place is a largely unproven and legally dubious state-run online framework.
Given the hasty drafting, it is frankly difficult to even get a clear picture of how regulators will turn the words on the page into a functioning industry. Legal Sports Report discussed some of the ways the inexact language could complicate the implementation and hinder the long-term success of NY sports betting, presuming policymakers can navigate the minefield of potential legal challenges they face in the short term.
We’ll instead limit our analysis to the financial prospects, giving us the unenviable task of delivering an inconvenient truth about the new law.
All right, here’s the plan…
The actual words and definitions used in the hasty authoring of this bill create a lot of uncertainty about the eventual implementation, but here’s what we know so far.
The NYS Gaming Commission (NYSGC) will run point for online sports betting expansion as it does for the retail operation by issuing a request for proposals (RFP) no later than July 1. Responses are due within 30 days, and regulators then have until Dec. 28 to select at least two winning bidders. Each of those apparently must be willing to deploy at least two separate brands (or “skins”).
The cost of licensure is fixed at $25 million for a term of 10 years, and the results of the RFP will dictate the revenue-sharing percentage for the whole operation. The highest bid will presumably be used to establish a uniform rate for all participants.
The governor’s budget includes $99 million in revenue from online sports betting during its first fiscal year, swelling past a half a billion dollars by 2024.
Mobile Sports Betting is coming soon in NYS.
This program will provide annual funding for education, youth sports and more. pic.twitter.com/YAUndCu3ZL
— Andrew Cuomo (@NYGovCuomo) April 7, 2021
We’ll ignore the negligible license fees for a moment as we try to get a feel for the raw revenue potential from the betting activity itself. These numbers are widely believed by those in the industry to be unattainable under this framework, so let’s crunch ’em.
Half a billion, you say?
Presuming a 50% revenue share, reaching $500 million in annual tax revenue would require operators to generate about $1 billion in total gross gaming revenue (GGR). New Jersey was the largest US market in 2020, for context, reporting just less than $400 million in GGR for the year. New York is larger than New Jersey, of course, but a portion of its potential is already reflected in those NJ sports betting figures given its proximity.
What’s more, there is no guarantee that any operator will be willing to pay a full 50% of revenue for nonexclusive access to New York. That percentage really figures to be the most optimistic assumption in our minds, but it’s not impossible. So let’s keep running with that math for now.
Reaching $1 billion in annual GGR ($500 million in tax revenue) would require operators to book at least $10 billion in total wagers, which would require an average New York adult to wager about $615 every year. This assumes a generous 10% hold, which is well above the national average of 7.2%.
If we instead use that number, total handle would need to reach closer to $14 billion to meet projections. And, if we soften the revenue share to a seemingly more realistic 40%, the handle requirement soars to nearly $17.5 billion.
That’s $1,100 per adult per year.
Those numbers are both concerning from a responsible gambling standpoint and out of reach for any state that uses a restrictive model. Per-capita handle in neighboring Pennsylvania, for the sake of comparison, was under $350 last year. The PA sports betting market is much more robust at this point in time, with a dozen online brands actively competing for customers.
New Jersey similarly relies on more than 20 brands to generate its US-leading GGR.
Duopoly: Own part of it
The model that New York is adopting takes most of its cues from New Hampshire, where DraftKings gives 51% of its online sports betting revenue back to the state in exchange for exclusive access. It’s worth mentioning that no other operator bid more than 20% for the same role.
Given the comparative size of the opportunity in New York, however, you can understand why Cuomo expects local operators to forfeit half of their revenue too. He’s targeting 55%, in fact.
This is not a monopoly though. This is a duopoly at least, expanding to an undefined number of brands over time.
How this structure will work in practice is an issue by itself, but forcing operators to share the market inherently reduces the value to each. An industry powered by two operators will not automatically be twice the size of a sole proprietorship, and adding competition to the equation forces them to be more aggressive with pricing and promotions than they might otherwise be.
While this is certainly good for the bettor, it is not necessarily good for the state’s bottom line.
Digging into the splits, monopolized US markets held an average of 9.2% of bets in 2020 while those with competitive operations held 6.5%. Using these numbers as a guide, a second licensee would need to increase the total wagering activity by more than 40% in order to drive a net revenue increase based on margins alone. That math additionally presumes that licensees will be willing to share the same percentage of revenue for a duopoly as they would for a monopoly, which is not a foregone conclusion to us.
So we still have some work to do to get to $500 million in annual tax revenue, but those license fees should help close the gap. Right?
Paying to play in NY
The $25 million license fee for each of the platform providers represents the largest of its type in the country. It’s also significantly less than the true value, and the sum of both/all licenses will be substantially smaller than it would be under the competitive model preferred by the General Assembly.
That proposal would have created seven licenses at $12 million apiece, which would have generated far more up-front revenue than the $50 million now expected via the RFP. Increasing the cost to $20 million (to match Illinois) could have produced as much as $140 million for the state, and there was likely some additional headroom beyond that.
Anyhow, that’s water under the Cuomo Bridge at this point. Back to the plan at hand.
Adding those license fees to the tally barely moves the needle, creating just $5 million in incremental revenue for the state annually. That amount of money is about as valuable to New York as the old nickel that lives under your couch cushions is to you.
Even if we include an exaggerated nine figures of licensing fees to account for the possibility of more than two licensees, there isn’t a universe that exists in which New York can collect $500 million from this industry annually.
Here’s another way to look at it: If every single legal wager in 2020 across all 21 legal US jurisdictions was magically teleported to New York sportsbooks, the state would have made about $750 million in revenue under this model.
These projections from the governor and his budget director aren’t just optimistic. They’re unrealistic.
Realistic expectations for NY sports betting revenue
So how much can the state actually make from online sports betting? It is extremely tough to say, but we can talk through some comparisons with other markets to get a sense of the possible range.
We mentioned New Hampshire earlier, so let’s start there. Its monopoly operation returned about $9.80 in per-capita tax revenue to the state in 2020, which provides a rough baseline to start with. If we just apply that rate directly to New York’s adult population of 16.3 million in a vacuum, we get about $160 million in expected tax revenue.
It’s worth noting, however, that New Hampshire is a small monopoly market heavily supported by visitors from Massachusetts. In other words, a lot of its revenue is not attributable to residents. A more reasonable estimate for per-capita taxes in New York based on this measurement might be something like $5 or $6, which would put it right in line with the national average of $5.62. New Jersey generated about $8 in per-capita taxes in 2020, and no state collected more than $14 (Rhode Island).
If we instead apply the national average to New York, the annual expectation drops below $100 million. We’re pretty far from a half a billion, and we might get even farther.
Depending on the exact implementation, a swath of 10 counties in central New York could be excluded given an agreement with the Oneida Nation. The affected area encompasses a population of about a million adults, including the city of Syracuse. The statutory prohibition on in-state collegiate betting, in place since 2013, additionally erodes more of the revenue ceiling from the market. Lastly, the proclivity of operators to limit or ban customers raises some doubts about the level of participation among prolific bettors over time in a market with limited competition.
It’s not all bad news
This Cuomo model does have some things going for it, though.
Although their presence will drive some interest in betting, the leagues will not receive a share of the proceeds as proposed in the legislature. Forgoing these royalty fees will keep tens of millions of dollars in the NY sports betting ecosystem, while running the operation via a state agency in a way that skirts the federal excise tax could shelter tens of millions more.
The additive effects of tourism and the above-average household income should additionally counteract some of the factors working to inhibit the market’s success, nudging expectations back toward the higher end of the range. Although the difference is smaller than either side wants to believe, the governor’s plan certainly has the potential to return more revenue to the state than the legislative plan.
If we were booking action on this, we’d set the line at $280 million at relative maturity in 2026. That includes a paltry $5 million from licensure, plus $275 million from actual wagering taxes. There are certainly valid arguments that could shade that number in one direction or another, but it’s at least in the right ballpark.
By our projections (and the sponsors’ own admission), the model proposed by the General Assembly would have struggled to generate $100 million in annual tax revenue — even adjusting for the expected increase in handle and revenue.
Rather than proving who’s right and who’s wrong, these numbers simply underscore the fallacy of these attempts to wring every last dollar out of legalized sports betting. Nearly three years after the fall of PASPA, lawmakers have still not learned the industry’s most basic financial lesson. Regulated sports gambling will never generate enough revenue in any state to make a significant impact on the budget — not even in New York.