US sports betting: is the final frontier finally open?

May 2018 US Supreme Court ruling on PASPA gives grounds for cautious optimism, but with so much at stake the game is not yet won

Last month (May 2018) saw the US supreme court strike down a decades old law (The “Professional and Amateur Sports Protection Act”, PASPA, 1992) that effectively blocked state level regulation of sports betting in the US. A rare dislocation in an otherwise mature market resulted in single-day double digit same-day gains for European gambling stocks as the market digested the prospect of an instantly doubled global market opportunity.

As a Betfair alum, and (PPB.L) shareholder, I was of course delighted. The US market, the behemoth of opportunity, has to date been firmly closed to licensed operators. Essentially a ruling on the 10th amendment, the supreme court has determined that federal censorship of state legislation is somewhat contrary to the US constitution. The obvious conclusion is that individual states are now free to legislate as they see fit for sports gambling licenses within their respective states…and that this will happen rapidly given the opportunity at hand.

Though there are definitely grounds for much optimism, and certainly there will inevitably be much increased activity, the reality perhaps requires a more cautiously optimistic approach.

The history

PASPA, originally enacted in 1992, was a federal bill to outlaw sports betting (excluding pools betting on horse racing known as “Advance Deposit Wagering”) in all but 4 states (which were grandfathered in, including Nevada) by over-ruling individual states’ ability to legislate for it. This legislation reinforced the provisions of “The Interstate Wire Act” (Wire Act, 1961) which already banned online (via wire telecoms) betting, though ambiguously defining what forms it was to apply to given that playing poker over telephone wires was perhaps not perceived in 1961.

The growth of internet accessibility and its capability as broadband became ubiquitous after the turn of the century, forced considerable uncertainty over the application of The Wire Act. In particular there was considerable uncertainty in the early noughties over its application to poker and casino gaming. At the time many offshore operators were ignoring the provisions of the act believing that extra-territorial international jurisdiction would not be claimed.

In 2006 the “Unlawful Internet Gambling Enforcement Act” (UIGEA) closed down this growing “grey” market by criminalising the acceptance of payments by payment processors (all of whom had considerable presence and assets within the US) for the purposes of gambling. Many operators who had US programmes immediately closed down their US facing operations. Showing that the legislation had real teeth, others that had continued to operate such as Full Tilt and Pokerstars were later forcibly closed down in a crackdown known as Black Friday (April 2011). Many industry executives were indicted during these times.

In a volte-face, in 2012 the DOJ ruled that the Wire Act did not apply to non-sports betting. In response however, only 4 states have since legalised online (casino game) wagering — Nevada, Pennsylvania, New Jersey and Delaware. This somewhat muted response is perhaps testament to continuing uncertainty at the state level as to both the legality and state level ability to execute on regulated gambling activity.

Moving forward

Given this record of equivocation, it will not be surprising if some uncertainty continues over whether the Wire Act still inhibits state level regulation of sports betting despite the abolition of PASPA. In fact there is a bill to Reinstate the American Wire Act (RAWA), a bill which seeks to clarify the laws at state and federal level and to outlaw online wagering completely (including poker and casino). The bill is supported by those with significant offline gaming interests in the US where the barriers to entry from new competitors are somewhat more severe than in the online environment.

There are also other issues which need to be grappled with from a logistical viewpoint. Though the majority of sports leagues were in favour of challenging PASPA seeing the levy and advertising revenue opportunities this might bring, most were not supportive of this challenge in particular (instead supporting a federal coordinated approach). The resultant state-by-state free-for-all is likely to be a challenge for the sports leagues, and indeed authorities, to manage. The reluctance and perhaps inability of these bodies to engage at a state-level may well delay the roll out to begin with, and will complicate and decrease the efficiency of any emerging solution. One has only to look at the horrendous complexity of the ADW levy structure to understand the impact that this might have. And don’t forget that even on the most generous legislative interpretation, all platforms will need to be built strictly on a state-by-state basis — the market will be a series of smaller pools and will be significantly less efficient because of it.

In summary the industry stands at the cross-roads of an enormous opportunity — the biggest unkept secret of all time, that Americans also like to bet. Given the magnitude of that opportunity and the gains which are at stake, the road to its adoption is however likely to bear many twists and turns. The market has perhaps already priced in these challenges with gambling stocks not having gained much further since the first-day euphoria. Activity in the sector is doubtless going to accelerate from innovation (and excitingly perhaps, VC investment) through to M&A. It will be an exciting few years.