Online sports betting celebrated its first half-birthday in New York last week, and there’s cause for celebration.
In some ways, the fact that NY online sports betting even exists in a legal setting still seems like a minor miracle given the years of fruitless work in the General Assembly that preceded its passage. Legalization, ultimately granted by former Gov. Andrew Cuomo, has immediately spawned a competitive industry that now provides safe and sufficient options for local bettors.
And record amounts of money for the state and its operators.
Through the first six months of operation, NY sports betting apps have together taken more than $8.5 billion in wagers. That brisk action has yielded more than $600 million in gross revenue and $300 million in taxes, outpacing even the most optimistic projections.
There’s no doubt New York is the new capital of US sports betting.
Okay, so the NY sports betting financials look … incredible
The prospect of generating meaningful tax revenue was the primary selling point for the Cuomo administration as it commandeered the legislative process and installed its preferred framework for the industry in late 2020. His plan most notably featured a tight limit on the number of operators and an outlier tax rate north of 50%.
The governor’s staff foretold of an eye-popping $500 million in annual tax revenue by the third year of operation, numbers that exist in a totally different realm than the single-digit or low-tens of millions of dollars most other states were eking out.
These numbers, the administration argued, would dwarf the $50 million in anticipated tax revenue under the more-traditional proposal that was struggling for support in the legislature.
Many in the industry — myself included — dismissed the governor’s outlook as wildly optimistic.
It's hard to say anything with much certainty given all of the unknowns… but I promise you we're not getting to $500M under this plan. Not in Year 3, not in Year 30… https://t.co/LPSQRQ2k9r
— Eric Ramsey (@Eric_Ramsey) April 6, 2021
Well this is awkward.
As it turns out, the former governor was being modest for a change. The Cuomo forecast for year three will actually turn out to be a significant undershoot by the time we get to December. Of year one. New York is well on pace to clear $600 million in tax revenue in this, its very first year of online betting.
As Cuomo’s spokesperson put it to us: “Taxpayers 1, hacks 0.”
Putting NY’s numbers into perspective
The fact of the matter is that very few of us hacks could have predicted this sort of performance from the start. Not even the Cuomo administration saw this coming. Their initial tax projection for the fiscal year that just ended was under $100 million.
Pennsylvania previously held the dubious distinction as the market with the highest competitive tax rate (36%), and it had collected a record $122.5 million in proceeds on just over $500 million in gross revenue the year prior. There were 13 PA sports betting apps in operation, however, significantly more than New York would be able to offer. And PA operators are additionally allowed to deduct promotional credits from their tax obligation, substantially (if artificially) increasing their total volume.
A more-extreme tax structure in NY which ignores bonuses figured to further dissuade operators from offering the aggressive promotions and pricing that were driving the neighboring industry. We wondered if regulators might even struggle to find four operators eager to part with half of their NY sports betting revenue for the privilege of operating in New York.
Operators positively scrambled to acquire one of the limited licenses, even with the knowledge that the tax rate could potentially reach as high as 64%. And right out of the gate, the first four months of online sports betting in NY were the busiest months of all time for any state.
From a tax perspective, each of the first six months now represent the six most-lucrative months in US history.
January’s tax haul of $63.3 million still stands as the single-month record to beat. But that mark is likely to fall a few more times before the year is over. Football season will once again bring unprecedented highs for this young industry.
Success is measured in tax revenue
Those who represent this industry have consistently cautioned policymakers that seek to legalize sports betting for the primary purpose of generating tax revenue. Margins are so narrow and costs so high, the story goes, that operators simply cannot produce a meaningful tax contribution in the context of a state budget that’s measured in tens or hundreds of billions of dollars.
New York is truly playing by its own rules so far, and it’s working to great effect.
It took just five months for NY to generate more tax revenue from sports betting than any other state has generated in its entire post-PASPA lifetime. And it’s going to run away from the pack during the second half of this year.
From an industry standpoint, it’s a bit of a shame that this model is producing such eye-popping results.
Tax revenue remains one of the worst of the good reasons to legalize sports betting, and there are some serious questions about the long-term sustainability in New York. But whether we like it or not, the success of a given market is primarily measured by the amount of tax revenue it produces.
And the Empire State is so far making a pretty convincing case for its heavy-handed approach.
Nine is enough; 51% isn’t too much
Taxes aren’t the only area in which New York’s success reshapes our view of the broader US sports betting picture.
Prior to 2022, the relative health of a given market roughly correlated to the number of brands available to bettors. New Jersey’s market of 20-plus operators led the league by a mile, and Nevada has double-digit choices for online bettors. Other states with a proliferation of brands, like Colorado (26) and Iowa (18), were also posting impressive per-capita results.
Nine just didn’t seem like enough for New York.
It’s now becoming apparent that licensing the Big Four brands (FanDuel, DraftKings, Caesars, and BetMGM) is enough for any market to realize a significant percentage of its total potential — perhaps upward of 90%. This truth holds in every competitive US market, though NY provides an especially clear illustration of the extreme top-heavy nature of the industry at this point.
The financial impact of any fifth operator is negligible for the time being. And that impact generally diminishes with each subsequent addition. It’s great for the industry that some states give bettors so many brands to choose from. But through a purely financial lens, it doesn’t appear to be necessary.
It’s also apparent from NY’s performance that large national operators are willing to pay a much higher tax rate than their historical lobbying efforts would suggest. It’s not yet clear if they’ll be able to sustain this level of operation under such an oppressive structure, but they’re certainly willing to try in big markets like New York.
These seem like the primary takeaways so far. But anyone who says they understand NY sports betting is lying to you. After all, what do any of us hacks know about this market?