Intelligence

SCOTUS Opens Door For Sports Betting: Three Implications For Finance

Lucas Pergament

Associate

The Supreme Court last Monday overturned a federal ban on sports betting, opening the door for states to legalize book-making and placing bets on contests.

There are dozens of fairly obvious ramifications that apply to many different industries. Here are three questions loosely related to finance, and potential answers.

How much will the valuation of sports teams rise?

In short, a lot.

Responding to the news, entrepreneur Mark Cuban, who owns the National Basketball Association’s Dallas Mavericks, told CNBC he expects the value of professional sports franchises to double. But Tilman Fertitta, owner of the Houston Rockets, wasn’t as bullish. “Remember, there’s already a black market,” he said last Monday. “Even though this has been pushed back to the states, there is still going to be a lot of federal regulation.”

While it’s tough to make the case that all teams are today twice as valuable as they were last week, Cuban’s basic point carries some weight. Soon, leagues will in all likelihood have the potential for new, lucrative partnerships with gaming corporations that make books.

Additionally, stadiums could double as sports-betting facilities and leagues could, to my understanding, conduct their own book-making activities or partner with established casinos to have a bookmaker on site. Fans could grab a hot dog and place a bet on their favorite player or team on their way to their seats.

The NBA has flirted with this idea already. Back in January, the league requested a 1% “integrity fee” from sports betting operations in Vegas to help compensate for the risk and expense created and the commercial value their product provides the gaming industry. Though that may not seem like much, it’s actually quite a steep price for dealing with state by state compliance and regulations. According to the AGA, legal sports books usually produce 3.5% to 5% in revenue and that a 1% “integrity fee” on all legal wagers would amount to 20% to 29% of a bookmakers total revenue.

As more teams implement data analytics into their player evaluations – the “Moneyball effect” – they will seemingly be free to license that data to counterparties, assuming no regulations to prohibit this get made. And obviously, the value of media rights could rise significantly, trickling down to individual teams through the leagues, which typically negotiate broadcast deals.

A lot of variables go into projecting the valuation of a professional sports franchise, but perhaps one of the biggest influencing factors that is rarely spoken about is the existence of a willing and capable buyer. In 2017, there was a new billionaire in the United States every other day, so increasing wealth inequality, combined with the new business initiatives now available to franchises and sports leagues, will in all likelihood combine to push valuations to new highs.

Does sports betting change consumer finance?

To the extent that sports wagers are financial products, there is a slight effect.

The commonly cited size of the sports betting market is $150 – 380 billion – a little more than double the amount of money as Americans spend on fruits, vegetables, and dairy, or 14 times what they spend going to the movies. The math behind this projection, however, is rather dubious: The estimate comes from the American Gaming Association, which adjusted a 1999 government estimate of about $80 billion in illegal sports betting to 2017 dollars using GDP growth. Writing in Marketwatch, an Ohio State University economist pegged the size of the market at closer to $67 billion – still quite large, but significantly smaller than regularly reported.

From here, there isn’t really a commonly accepted set of facts to work from. No one knows how much of that activity gets funded by bookmakers who make predatory loans, and its difficult if not impossible to accurately estimate the percentage of financial catastrophes like lost savings or bankruptcies that have gambling addiction as a root cause.

Broadly, the capability to bet on sports is from a consumer finance standpoint similar to the capability to bet on, say, cryptocurrency. Crypto trading has not revolutionized consumer finance. What it has done is provided a small group of enthusiasts with something new to do with their money. There isn’t going to be new lending activity attributable to folks who want to go all-in on the Jets next year, but there will certainly be apps that have transactional or financial dimensions that grow in popularity.

How might sports betting impact state revenues?

Unfortunately, the ruling does not project as a major revenue boost for states.

First, state legislatures must act. The matter that set all of this in motion was Christie v. NCAA, which challenged the constitutionality of a 1992 federal law that banned states from authorizing sports betting. SCOTUS deemed the law unconstitutional, so now states are free to legalize sports betting – or to not.

Nine states are well-positioned with immediate effect. Delaware, Montana, Nevada, and Oregon legalized sports betting before the federal prohibition went into effect, and those laws are presumably once again in force. Connecticut, Mississippi, New York, Pennsylvania, and West Virginia recently took successful legislative action on the subject in anticipation of the SCOTUS ruling.

However, most state legislatures are adjourned for the year, so – barring any special sessions – this is business they will most likely address in 2019. However, new state-level legislation in 2018 isn’t exactly a longshot: some statehouses are already contemplating special sessions to respond legislatively to last year’s tax law passage, and could address sports betting at that time as well.

Regardless of when more states act to legalize sports betting, the revenue implications are minimal. According to the American Gaming Association, adding sports betting to the forms of gambling already legal in many states would increase net betting by as much as $41.2 billion, which it says would net state and local governments about $3.4 billion in taxes.

But, collectively, states spent $2 trillion last year.

The potential for sports betting to produce revenue for states is real, but its potential to solve their budgetary problems seems minimal.

Most sports fans are inherently competitive – they want to be, and need to be, right.  Most have an opinion and a prediction that they talk about with their friends, and being able to put their money where their mouth is will drive activity once the state-level approaches are solidified.

For most people who make bets on sports as casual hobbies, the validation of making a correct prediction is almost as rewarding as the money made. Fantasy sports are so hugely popular because it gamifies the fandom of small groups. Now there is an opportunity for innovators to improve the experience of sports betting.

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