Newsflash: Legal Online Gambling Doesn't Take Place In A Vacuum
Online sportsbooks and casinos compete against a host of black and gray market operators. Policy should reflect that reality.
Editor’s note: “Newsflash” is sarcasm, if that wasn’t clear.
Six years into the expansion of legal online sports betting, there seems to be an increased emphasis on illegal offshore gambling operations of late.
We’ve seen:
A cease-and-desist letter to Bovada from Michigan (just this week)
Attempts to quantify the size and reach of the offshore market (good luck with that).
Regulated US operators complain that new restrictive policies will drive bettors offshore.
Let’s start here: No matter how you spin it, offshore online sports betting, casino and poker is not operating legally anywhere in the US. If you, as a bettor, want to gamble offshore and it’s your best option, have at it. But at the same time, these companies have no god-given right to operate in the US, nor even a compelling legal argument that they aren’t violating myriad federal and state laws. (The only weight on the other side of the scale is a World Trade Organization case that pre-dated the legalization and regulation of online gambling in the US).
So what can or should be done about offshore online betting vis a vis the regulated market? It comes down to two fronts: enforcement of existing laws and policies that realize that legal operators don’t exist in a vacuum.
Enforcement
I’ll spend less time on this, because it doesn’t feel like it will ever be a meaningful part of the equation. Offshore betting has existed for decades and I’ll wager it exists in some form for decades more. The will to confront it in the US seems extremely low. This week’s action by Michigan is an outlier, and it’s also just one of many places where Americans can gamble offshore.
Enforcement of existing laws — either by the Department of Justice or by the states — is certainly a way to channelize people to the regulated market. States playing Whac-A-Mole* with offshore operators is unlikely to be effective unless Michigan sets off a wave of similar actions (I’ll bet the under on that). It would take the DOJ getting more involved to move the needle. While either of those things could happen, it seems like an unlikely scenario given the history.
In any event, it would be nice if states did a better job of acknowledging reality. States that feature “bans” of online gambling are many times just banning regulated operators. That is fine if that’s what they choose, but current laws are not an effective ban on online gambling without other action. And states that have legalized online gambling often still have to deal with black and gray market options.
So that brings us to the more interesting discussion of online gambling policy, which is an actual way to address the issue, and a way that policymakers are arguably making it easier for offshore companies to compete.
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Taxes
Taxes are an issue gaining prominence in a period of re-regulation, but it’s also a good entry point for a discussion of legal vs. offshore gambling. The discussion has reached a fever pitch after the Illinois legislature passed a bill to increase the tax rate on sports betting, especially on the top operators.
I understand that sportsbooks have reaped what they sowed to some extent by agreeing to a 51% tax rate to serve New York. But that doesn’t mean it’s a great idea to replicate extreme tax regimes everywhere.
Believe it or not, there’s some happy medium between extremely low taxes and high taxes that make it challenging for sportsbooks to operate and grow.
Why is all of this germane to the discussion of offshore sportsbooks and competition for legal sports betting? These are costs of doing business that don’t exist offshore. They don’t pay state taxes and licensing fees. They don’t pay the .25% federal excise tax on all sports betting handle.
Do higher taxes send people offshore just by existing? No, but in the long run it could lead to fewer legal operators, a worse product, more vig, etc. And all of that could help channelize bettors back to offshore, providing an increased structural advantage for offshore. I don’t think that dynamic should be discounted. Raising taxes just because you can without any consideration for the wider impact is poor policy.
Prohibiting bet types
Another front is a push to prohibit or limit certain types of wagers in the legal market. Right now the idea of banning college player prop bets is gaining steam; the NCAA is lobbying for it and some states are listening.
On its own, does banning college prop betting push bettors entirely offshore? Probably not, but there are some people that may seek it out there. Does it take away meaningful revenue? No.
What it does do is erode the regulated product. You are giving the offshore market a differentiating factor on the customer side of things. I also don’t see banning college player props as 1. an effective policy solution to match-fixing or harassment of players or 2. a meaningful “ban.” Players can still fix outcomes and will be harassed because of other bet types. People will still bet player props offshore as well as via fantasy parlay apps and sweepstakes sportsbooks.
The longer game of banning college player props is the potential prohibition of more bet types. If regulators (or leagues) start calling for more bans based on this precedent, we’re definitely heading down a road where the legal industry’s product could become demonstrably worse than offshore.
Six years in, a change in focus?
For six years, the focus in the US has been providing a legal and regulatory framework for online sports betting. Just creating the industry from scratch was enough.
But as sports betting policy gets a second look in a lot of states, it would be wonderful to have meaningful discussions of how to support the legal industry vs. the offshore industry (and gray operators, for that matter.) How can a state help it to grow in a sustainable yet responsible way?
Legal online gambling apps have both headwinds and tailwinds in making a dent in the offshore market. If we are going to have legal sports betting, states should lessen the headwinds and provide more tailwinds when it’s appropriate. Policies that hurt regulated operators while pretending that bettors don’t have other options is not a recipe for successful policy.
*Whac-A-Mole is a game of skill.
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