Any expectations that US sports bettors may have that state-regulated sports betting will offer the best odds in the market are probably wide of the mark.
There are good reasons, or at least understandable reasons, why this should be so. First, let’s take a look at the problem.
In an article for the New Jersey Trentonian, journalist Jeff Edelstein took a big swing at the bad odds being offered by the newly released DraftKings sports betting app adding that those offered by the Fanduel Sportsbook at the Meadowlands race course were just as bad.
“The odds currently suck in New Jersey. FanDuel, the other major daily fantasy sports player, is behind the sportsbook at the Meadowlands, and they’ve been plagued with the same issues. The odds there went from “should be a crime” to “just pretty lousy” in the few weeks they’ve been open for business.”
Edelstein makes two claims. First, he suggests sportsbooks are exploiting the ignorance of their customers. Second, he says that the “high” taxes in New Jersey are to blame:
“Because New Jersey wants their taste, much like Butchie the Barber gets a little sumpin-sumpin from Jimmy the Snake. Except New Jersey doesn’t just want to dip its beak into the profits; it wants to stick its whole head in there and tear it up.
Here’s a didja know: Nevada taxes sportsbooks 6.75 percent. New Jersey taxes brick and mortar sports books 8.5 percent, and taxes online sportsbooks 13 percent(!), once again proving the biggest racket going is the New Jersey state legislature.”
In his idiosyncratic style, Edelstein is partly right, but there’s a bigger story behind the issue.
State-segregated sports betting means different prices
Fundamentally, the odds of a sports bet are the price you pay for making the bet. There’s a whole lot of economic theory behind setting prices, but we can focus on the issues resulting directly from state regulation.
Sports betting is being rolled out in states after the Supreme Court overturned PASPA. The ruling handed responsibility for sports betting law back from the federal government to the states.
In the states which regulate sports betting, residents and visitors can bet with locally licensed providers. They can’t bet with operators licensed by other states. And they shouldn’t bet with unlicensed overseas providers—the black market.
Sports bettors in any particular state are a captive market. their legal betting options are limited to the licensed operators their state has approved. This automatically limits competition, and a handful of licensed providers have only a certain capacity to compete on price, and almost no incentive to begin a price war with each other.
Sportsbook operators will set prices to maximize their revenues.
The price level depends on a host of factors that vary state by state. We don’t expect to pay the same for a haircut in Kansas as we would pay in New York. However, we do expect to pay the same, excluding sales taxes, for a Toyota.
One is a service that can only be offered locally, the other is a good that can be bought from anywhere in the US (in economics, one is a tradable good, the other isn’t).
State localized sports betting means different prices—lower prices in poorer states, higher prices in wealthier states.
Taxes always have an impact
Edelstein’s second point about taxes also misses the mark, at least as far as New Jersey is concerned.
Of course, if the government levies taxes, then sports betting businesses have to take them into account. But there are several options available. Offering worse odds isn’t the first option that operators want to choose.
Typically, international sports betting businesses respond to gaming taxes by reducing player VIP benefits and reducing their profit margins before adjusting their prices.
New Jersey’s taxes are low enough to ignore
New Jersey’s tax levels are extremely competitive compared to other national jurisdictions. Yes, Nevada’s taxes are lower, but not so much lower that they make any real difference. Where the tax issue will come into play is in Pennsylvania.
Not only do casinos in Pennsylvania have to pay $10 million for a sports betting license, but there’s another $10 million for interactive gaming. On top of this, taxes on sports betting have been set at an exorbitant 36 percent.
Now we are taking some serious money. At this level of cost, sports betting operators can’t simply eat the extra by reducing margins.
They have to reduce marketing costs on player benefits and raise their prices by offering worse odds. Otherwise, they will lose money.
The silver lining is that just maybe, the casinos will be prepared to lose money, at least for a while.
Casinos can afford to lose money in the early years
One of the unexpected benefits of online gaming in New Jersey has been its value in attracting more people to the state’s live casinos. Online gaming reaches demographics that the live casinos have trouble addressing. As a result, offering online gaming has benefits over and above its own inherent profitability.
The consequences of not offering sports betting could be that casinos see their patrons leave for competitors who do. Maybe this is one reason why fully nine of Pennsylvania’s casinos applied for the $10 million for online gaming licenses.
Then there’s the early market imperative to secure customer loyalty. In effect, casinos can buy market share by offering better odds than their peers.
Loss-making admittedly, but casinos are big businesses, capable of taking a long-term view. Plus, the new sports betting market should be large enough to justify the investment.
In France, after online poker regulation was introduced, only 8 of 11 operators had ever made a profit in any quarter in the first five years of doing business. They sucked up the losses in the hope that taxes would reduce and the profits would go to the last man standing.
The black market may offer better odds, but at much higher risk
The local unlicensed bookie may continue to take bets at odds similar to those in Vegas. The offshore online sites will certainly still compete for your betting dollar too.
They have much lower costs than regulated sites since they pay no taxes or license fees and they don’t provide expensive layers of customer protection.
But is the risk worth the lower price? History suggests that it isn’t. All goes well until the point where something drastic occurs. Then you lose your whole online balance, more than offsetting the additional cost of sticking to the regulated market.
So yes, US customers at state-regulated sites will pay more for the protection they offer. State licensed sports betting businesses will set their prices according to local conditions, regardless of whether the odds are better in Nevada.
And states like Pennsylvania that set their taxes and license fees too high will fail to convince punters that they should leave their offshore site. At some point, those customers will decide that the costs outweigh the risks.